Uniform Trust to Minor (UTMA) and Uniform Gifts to Minor (UGMA)
What are they?
Uniform Trust to Minor (UTMA) and Uniform Gifts to Minor (UGMA) accounts are custodial accounts. They’re designed for the benefit of a child. The account is owned by the child, but must have an adult custodian who manages the account. In New Hampshire, custodianship ends when the child turns 21. This means the child takes ownership of the account. UTMA or UGMA money doesn’t have to be used towards college expenses.
Pros of UTMAs and UGMAs:
- Tax advantages: UTMA/UGMA accounts may offer tax benefits.
- Funds aren’t limited to education: Assets in UTMA/UGMA accounts can be used for anything.
- Flexible contributions: Assets in a UTMA/UGMA account can be cash, as well as stocks and bonds, real estate, mutual funds, and more.
Cons of UTMAs and UGMAs:
- Automatic ownership transfer: In New Hampshire, the child automatically takes ownership of the account when they turn 21. This means the custodian loses control over the funds.
- FAFSA disadvantage: UTMA/UGMA accounts are considered student assets when you complete the FAFSA. This means you might be eligible for less financial aid.
- Beneficiary can’t change: Once you open an account in a child’s name, you can’t change the child beneficiary.
Coverdell Education Savings Account
What is it?
A Coverdell Education Savings Account is a tax-advantaged education savings account. You can start a Coverdell account for a child under the age of 18. You can’t contribute to the account once your child turns 18. And your income must fall below a certain level to open a Coverdell account.
Pros of Coverdell accounts:
- Tax-free: Your money grows tax-free, as long as it’s used for qualified college expenses. These include tuition, fees, textbooks, supplies, equipment, and room and board.
- FAFSA benefits: A Coverdell account is counted as a parent asset when you file the FAFSA. This may help increase your financial aid eligibility.
- School flexibility: Coverdell money can be used to pay for K-12 schools as well as college.
Cons of Coverdell accounts:
- Age cutoff: You can’t contribute to the account once your child turns 18.
- Use it by 30: If your child hasn’t used Coverdell money by the time they turn 30, they must withdraw it and pay taxes.
- Maximum yearly contribution: You can’t contribute more than $2,000 per year to a child’s Coverdell account.
- Income cap: To make the full $2,000 annual contribution, your income must be $95,000 or less if you’re single, and $190,000 if you’re filing jointly.
See Publication 970 Tax Benefits for Education at irs.gov for more details on Coverdell accounts.
What are they?
A savings bond is a stable, safe way to save money. When you buy a savings bond, you’re loaning your money to the U.S. government for a period of time. In return, the government pays you back that money, plus interest, at the end of the bond period (this is called “maturity”).
- Series EE bonds have a government-backed guarantee to double in value over their initial bond term.
- Series I bonds can offer a fixed rate of return that adjusts with inflation over time.
Pros of savings bonds:
- Stable and safe: Savings bonds are one of the most stable and dependable ways to save money. The government guarantees your money back, plus interest.
- Predictable: When you buy a bond, you know how long the term is and what the interest rate is. That means you know exactly how much money you’ll get back, and when.
- Tax-free: Your earnings on bonds are usually tax-free if you use them to pay for higher education expenses.
Cons of savings bonds:
- Less risk = less reward: Bonds are less risky than 529 plans or other investments based in the stock market. But that means less possible gain, too.
- Money is locked away: Once you purchase a bond, you can’t cash it in for at least one year.
- Penalty for cashing in early: You’ll pay a penalty if you cash in certain bonds within five years. The longer you wait to cash in a bond, the more money you’ll earn in interest.
Visit savingsbonds.gov for rates and more information on savings bonds.
What are they?
An affinity program rewards you for shopping at certain stores or buying certain products. These programs give you a rebate or percentage of the money you spend. College savings affinity programs deposit your rebates into a college savings account.
Parents, family members, and friends can register their credit cards with the affinity program. These programs track purchases at participating stores.
Investment companies that manage 529 college savings plans often offer rebates to customers. For example, New Hampshire’s college savings plans are managed by Fidelity Investments. Fidelity provides a rebate to its credit card customers. They’ll deposit money into your Fidelity-managed 529 Plan account.
Pros of affinity programs:
- Low effort: Once you have the program set up, all you have to do is shop!
- No extra cost: You’re saving money for college just by doing your regular shopping.
- Great supplement: Affinity programs are a great way to supplement regular long-term college savings and/or investments.
Cons of affinity programs:
- Spend to save: You have to spend money to get the benefits of an affinity program.
- Compare rewards: The percentage you get from a credit card affinity program might not be as high as what you’d get from other programs. It’s important to shop around and make sure you’re getting the best rebate.
Some credit card providers offer specific 529 rebate plans. These plans deposit your “rewards” (a percentage of the money you charge) into your 529 account. Or you can do the legwork yourself and deposit your rewards into your 529 account. Check with your credit card provider, and compare with other cards to find the best rewards.