Some
people prefer other types of education investments besides 529 plans and
Coverdell account. For some people these options do not offer enough
control to the investor and some people do not even know that their child
is going to want to go to college so they do not feel comfortable
investing in a questions mark. For these people education bonds might just
be the perfect answer.
You will have the option of going
with EE bonds or Series I bonds as both of these bonds are part of this
program and they were both created by the treasury department back in
1990.
While these are not high risk, high
return investments they are nice and sage and for many people this is key.
These bonds are wonderful because even if they do not end up getting used
for a college education they will not be penalized when withdrawn. If they
are used for school they won’t even get taxed federally. These bonds ban
be bought for anywhere from $50 to $10,000. This diversity is another
thing that makes them so popular with some parents.
EE bonds in particular generally
earn about 90 percent of the average yield of the 5 year Treasury
securities. The rates on your bonds will be gone over and adjusted twice a
year. There are requirements that you will have to meet in order to get
this type of bond so check into this before you count on them.
Redeeming bonds will be affected by the amount of
money you make each year. You will have to meet some income guidelines in
order to qualify for a tax exclusion. For instance in 2004, a taxpayer had
to have made less than $59,850 as their adjusted
gross
income in order to use the full exclusion. And if you make over $74,850
you will not be able to get any exclusion at all. These numbers of course
are different for those who happen to be married and who are filing
jointly, in that case they are $89,750 and $119,750.
Of course the above number change
from year to year as they get adjusted and what is true today may not be
the case when it finally come time to redeem the bonds that you have
purchased. Just remember that the money considered income in the year you
redeem will have to include the interest that you have made on he bonds
that you are redeeming. This can actually affect your exclusion so watch
out.
In order to purchase these bonds you
have to be at least 24 years of age so there is no way to get around some
income and tax problems that can occur by having the child purchase the
bonds instead of the parents.
The expenses that will be considered
qualifies ones are tuition and school fees. You will not be ale to count
books or room and board as expenses. And you will have to take into
consideration other things such as your grants, scholarships, fellowships
or any other type so f aid that will be reducing the amount that college
will be costing you.
If you end up redeeming more money than you should
have then you will have to pay tax on this withdrawn money and that tax
will be pre rated.
The sooner you purchase the bonds
the better because if you cash them out too soon, within three years of
purchase you will have to face some serious penalties. In fact, you will
lose three months worth of interest.
Custodial accounts are best for
families who are not planning on getting any financial aid. Who have a
plan for paying for college without such help such as families who earn
too much yearly income to qualify for financial aid. Custodial accounts
are also known as Uniform Transfer to Minors Act accounts or even Uniform
Gifts to Minors Act accounts. These are popular because not only are they
highly flexible they also allow for up to $750 each year in tax free
interest earnings.
They are not perfect though, in fact
they can be very costly for those who might need some financial aid to go
to college. While it is the parent or guardian who owns the account it is
the child who the assets are considered to belong to. And these accounts
become the property of the child as soon as the child turns 18 and at that
point they can use the money for whatever they want to and this may have
nothing to do with
school.
