Saving for your children’s education
As the costs of education continue to rise, many parents say that they want to think about how they can save towards their children’s anticipated education expenses to help lessen the future burden. Even if you are unable to save substantial sums of money, putting money aside early can help create a sizable nest egg to put towards university costs. After all, the more time you have on your side, the more the savings have the ability to benefit from compound growth.
Rather than looking to set aside larger sums of money each year, it can sometimes be beneficial to work out a monthly amount that is feasible to set aside for savings. This tactic allows the savings process to become part of your regular expenses and for many people will not noticeably impact day-to-day living. Many times grandparents and other close family members are keen to help contribute towards savings through monetary gifts while the child is very young and generally unaware of what presents they are getting for special occasions.
If you are saving regularly towards your children’s education, the next question is usually where best to place the savings. The answer to this depends on your individual objectives, the level of flexibility you want to maintain with the funds and also your tax status. As an American in the UK, some of the UK options may not provide the same level of tax benefits so this is best explored upfront to determine the option that will best meet your needs.
Some options to consider include:
(1) 529 Accounts – These are US tax-advantaged investment vehicles designed to encourage saving specifically for the future higher education expenses of a beneficiary. A key feature of the 529 plan is the tax-free growth of earnings used for education savings. The contribution allowances are very generous which provides the ability of set aside a large sum of money. Contributions to a 529 plan are after-tax dollars that then grow tax-free until distributed. Distributions from 529 plans for qualified higher education expenses are exempt from federal income tax. As there is some grey area which respect to the funding of 529 plans whilst you are UK tax resident, it is best to speak with the US/UK tax accountant before making 529 plan contributions.
(2) Coverdell Education Savings Accounts – This is a US tax-advantaged investment account designed to encourage savings to cover future education expenses. The tax treatment is similar to a 529 account but the contribution limits are much more limited with a current maximum of $2,000 per year. Additionally the income level of a donor may affect contributions into a Coverdell ESA, which does not affect a 529 plan. Whilst funds must be distributed to meet qualified education expenses, which is similar to the 529, the funds can be used towards primary and secondary school expenses which is not allowed with 529s.
(3) UTMA/UGMA Accounts – These are accounts in the US that allows a minor child to receive gifts that are managed by an appointed custodian until the minor reaches the age of 18 or 21 (depending on the State). There are limited tax advantages to this type of account as any income from a custodial account is taxed at the child’s rate and subject to the US kiddie tax rules. However, it allows for complete flexibility in the ultimate use of funds should a child not pursue higher education.
(4) Junior ISAs – If you are UK tax resident, you can save money in a Junior ISA for your children. The 2015/16 annual allowance is £4,080 and earnings on this money will be UK tax exempt. If you are American, you will need to ensure that any underlying investments are US tax-efficient since you will not enjoy the tax exempt status in the US. However, it can be a way to maintain flexible access to the funds, save in Sterling and shelter funds from UK taxation.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.