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College Savings and Saving Taxes.

October 10, 2011
Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management

If you have children or grandchildren who are planning to attend college, there are all kinds of strategies to help save for those costs, including buying savings bonds, setting up accounts under the Uniform Transfers to Minors Act and simply keeping money in your own name.

But if your goal is to minimize taxes without damaging your family's chances of getting college-financial aid, you might consider the advantages of Coverdell education savings accounts and 529 college-savings plans.

Both Coverdell accounts and 529 plans can give you tax-free investment growth if the money is used for qualified education expenses, and some states also offer special tax incentives for funding in-state 529 plans.

In addition, both 529s and Coverdells are treated fairly kindly in the federal financial-aid formula, so they shouldn't greatly reduce the federal aid you might receive. But be warned: Colleges may use different rules when doling out the financial aid they control.

You can invest in a 529 college-savings plan, no matter what your income--and the amounts you can contribute are substantial. For instance, you're typically limited to giving another person $13,000 each year without worrying about the federal gift tax. But with a 529, parents could each invest $65,000 and count it as their gift to the child for the next five years. If you elect to treat a gift as being made over five years and you die before the end of that five-year period, that portion of the gift that was allocated to the period after your death would be included in your estate.

One downside with 529s: You're limited to the investment choices offered and those choices may have high costs or poor performance. By contrast, with a Coverdell account, you have more investment freedom. But Coverdells have their own drawbacks. Annual contributions are limited to $2,000 per child. And to contribute the full $2,000, your modified adjusted gross income must be below $190,000 if you're married filing jointly and below $95,000 if you're single. Above those income thresholds, the amount you can contribute is phased out.

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

The information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, investments, or other products named.

Terms, conditions and fees for accounts, products, programs and services are subject to change.

Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

You should consider the investment objectives, risks, charges, and expenses of any 529 Plan Investment Options carefully before investing. This and other information is contained in the 529 Plan disclosure Document, which should be read carefully. Before investing, you should read the Plan Disclosure Statement carefully and consider whether your state of residency-- or your intended Designated Beneficiary's state of residency--offers any benefit, such as a state tax deduction, which is only available for investments in that state's 529 savings program.

Investments are subject to market risk, fluctuation in value and possible loss of principal. Before investing, investors should consider whether tax or other benefits are only available for investments in the investor's and designated beneficiary's home-state 529 College Savings Plan.

Note: The 529 donor must be alive on January 1 of the year for which they claim the annual gift-tax exclusion or that portion of the contribution must be added back to the donor's estate for determining the taxable estate.

© 2011 Citigroup Inc. Citi Personal Wealth Management is a business of Citigroup Inc., which offers investment products through Citigroup Global Markets Inc. ("CGMI"), member SIPC. CGMI and Citibank, N.A. are affiliated companies under the common control of Citigroup Inc. Citi and Citi with Arc Design are registered service marks of Citigroup Inc. or its affiliates.

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