Finding the Right Savings Plan for Your Children or Grandchildren

There are many ways to prepare for elementary, secondary and college expenses or other future needs for children or grandchildren. In light of the changes resulting from the 2017 Tax Cuts and Jobs Act, it helps to understand the vehicles below and how you can incorporate them into an effective educational funding plan.
Coverdell Education Savings Account (ESA)
The Coverdell ESA, created as part of the Taxpayer Relief Act of 1997, is a tax-advantaged savings vehicle that is like a 529 plan but with lower contribution limits. You can contribute up to $2,000 per year to a Coverdell ESA established for a child or grandchild. The Coverdell ESA lets you save money for the qualified education expenses of the named beneficiary. Qualified education expenses include college expenses as well as a range of elementary and secondary school expenses. Be aware that to contribute to an ESA, you must meet the modified adjusted gross income (MAGI) limits. The MAGI income phase-out is $190,000 to $220,000 for a married couple filing jointly. If your MAGI is greater than $220,000, no contribution is allowed.
UTMA Account
The Texas Uniform Transfers to Minors Act (UTMA) authorizes a parent or guardian to hold assets on behalf of a minor child until the child turns 21. There may be lifetime expenses related to your child’s education or other needs that are not eligible to be paid by an ESA or 529 plan – establishing a UTMA account could help you meet those additional needs.  If your child’s income from interest, dividends or capital gains is less than $2,200 a year, there may be no income tax. Thus, you can use the UTMA account to accumulate money tax free without the education spending restrictions like a 529 plan.  The 2017 Tax Cuts and Jobs Act changed how a child’s income is taxed.  Instructions to IRS Form 8615 give a good summary of the new rules.
529 Plan Accounts
One of the most popular education savings vehicles is the qualified tuition program, often referred to as a Section 529 plan. Named after Section 529 of the Internal Revenue Code, this tax-advantaged education savings plan is designed to help set aside funds for future college costs. It may be established by a parent, but anyone can contribute. In addition to college costs, up to $10,000 a year can be used for elementary and secondary tuition. Contributions to this plan are treated as a gift to the beneficiary and are subject to gift tax exclusion limits (which are $15,000 annually for each donor, or $30,000 annually for a married couple). It is possible to “pre-use” up to five years of the annual exclusion amount for a gift to a 529 plan, but you will need to file a Gift Tax Form 709. All 50 states and the District of Columbia sponsor 529 plans, and some states may allow an income tax deduction for 529 contributions.
ABLE Accounts
ABLE Accounts are tax-advantaged savings accounts for individuals with disabilities and their families, which can be created as a result of the passage of the Achieving a Better Life Experience Act of 2014 – better known as the ABLE Act. The beneficiary of the account is the account owner, and income earned by the account will not be taxed. A “qualified disability expense” means any expense related to the beneficiary as a result of living with a disability – including education, housing, transportation, employment training and support, assistive technology and other expenses that improve quality of life.
Direct Payments of Medical and Tuition Expenses 
Gift tax rules under IRS Section 2503(e)(2) do not treat as a taxable gift a direct payment to the provider of medical care or to an educational organization for tuition. Thus, a grandparent or other person may make these payments on behalf of the child with no dollar limit.
Set Up a Trust
Families with more complex situations may want to have an attorney draft a gift trust – which can continue beyond age 21 for the child’s benefit and be used for a wide variety of needs.
As you consider your child’s educational savings plan, you may want to talk to a qualified financial professional, who can help you better understand what’s available and what fits your unique situation. Best results generally involve using a combination of the available options. Whichever savings vehicles you choose, it’s a good idea to get started as soon as possible to meet your child’s financial needs.