By Alyzabeth R. Smith, CPA, Tax Consultant, Wipfli LLP

Of the many gifts children receive, education assistance trumps grandma’s $5 gift card or a lifetime of your unsolicited (but annoyingly accurate) advice. Education savings vehicles haven’t changed much in the past few years, but it’s good to have a reminder of what is available in case changes in your financial situation have altered your eligibility for one or more programs.

529 plans are state- or school-sponsored savings vehicles. These plans fall into two categories: college savings and prepaid tuition. A state-sponsored college savings plan is generally managed by a broker selected by the state. It is important to understand, however, that if a student will be seeking financial assistance the 529 plan assets could affect eligibility, depending on who owns the plan.

Parents and related parties may use UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gift to Minors Act) accounts to save for their children’s education. These assets will likely impact a student’s ability to qualify for financial aid. Contributions can be made to these vehicles without limitation, but are subject to gift tax rules. With a 529 plan, gift tax implications must also be considered, and contributions may have a lifetime limit. The 529 plan lifetime limit is an important consideration for those who may want to fund a child’s costly post-graduate degree. UTMA and UGMA accounts are set up in a child’s name, and ultimately your child (not you) owns the assets contained therein. This means that if your child reaches the age of majority (as determined by state law) and decides he or she wants to use the UTMA/UGMA assets to buy a boat and sail around the world, he or she can do so with comparatively limited tax repercussions. If they tell you of their seafaring plans on their 15th birthday, you cannot take back the assets you already contributed to the account, as those assets are irrevocable gifts. Additionally, assets in UTMA/UGMA accounts are not tax deferred. Your child (or you if a formal election is made) would pay taxes on any income incurred.

Now that you know that your child can take the UTMA/UGMA money and run with it, you may be leaning toward a 529 plan as your education savings vehicle. Keep in mind, though, UTMA/UGMA accounts can also be used for private elementary or high schools. This is an additional bonus for families who plan to comprehensively fund a child’s education. They may also provide more flexibility with investment choices than you would have with a 529 plan.

For parents with students currently enrolled at a qualified institution, tax breaks can be a big help. The American Opportunity Credit, tuition and fees deductions, and the Lifetime Learning Credit are also ways to get some financial reprieve. If your child is not college age, don’t wait until then to start helping out. Consult your tax advisor for recommendations on which savings plan best suits your situation. Even if you can’t foot the whole bill, your child will still appreciate any amount you faithfully stash away every year, no matter which savings vehicle you choose.