Frequently Asked Questions (FAQs)
College Savings Questions
- Do I still have time to invest if I'm getting a late start?
- How do I invest for retirement and college at the same time?
- Which type of college account should I choose?
- What if I want to open an account for college and other, unrelated expenses?
- Can I contribute to more than one type of account?
- Can I access the money in the short term if there's an emergency?
- The UGMA/UTMA account does not feature tax-deferred earnings or tax-free withdrawals, so how is this type of account taxed?
- Where can I find information about account minimums, fees and taxes on different types of college investing accounts?
- Will I use the investments exclusively for college expenses?
- Do I need an investment account that offers multipurpose uses?
- Should I use my traditional or Roth IRA for college expenses?
- Which investment account offers me the most tax benefits?
- What is the difference between the Uniform Gifts to Minors Act and Uniform Transfers to Minors Act?
- With a UGMA or UTMA account, who owns the account?
- What if the minor does not have a Social Security number?
- What investments does American Century Investments offer for Uniform Gifts to Minors or Uniform Transfers to Minors accounts?
- Can there be more than one custodian on the account?
- What happens when the minor reaches the age of majority under the Act?
- What is the minimum investment required to open a Uniform Gifts to Minors or Uniform Transfers to Minors account?
- Are Uniform Gifts to Minors (UGMA) or Uniform Transfers to Minors (UTMA) accounts subject to any fees?
Absolutely. It is true that you'll have a better chance of reaching your college goal if you start investing early, but it's never too late to get started. Simply start investing as soon as you can. You can still take advantage of time with your investments.
Retirement and college are important goals, but it can be hard to find the money to invest toward both. Even small amounts can add up over time. Maybe you will find that you can invest a small amount each month in your retirement account and a college account. Or, if you receive a bonus from work or an income tax refund, you may be able to divide the amount and invest toward both of your goals.
If you plan to open an account to use exclusively for college expenses, a 529 Plan may be your best choice. A 529 Plan offers many benefits, including withdrawals that are free of federal income tax and penalty if used to pay for qualified expenses.
You may want to consider a Coverdell Education Savings Account (CESA) if you also might use the investments for elementary or secondary school expenses. You can make tax-free withdrawals from a CESA for elementary, secondary or college expenses.
Distributions are tax-free, provided the funds are used for qualified expenses, such as room, board and tuition. Otherwise, the earnings could be taxed and subject to a 10% penalty.
If you open an account under the Uniform Gifts/Transfers to Minors Act (UGMA/UTMA), the money in the account must be used for your child's benefit, whether for education or other expenses. The account will be registered in your child's name with you or another adult acting as custodian. Your child is the legal owner of the UGMA/UTMA investments and gains control of the account at a set age defined by your state (usually 18 or 21). You may want to consider whether this change of control meets your goals for your investment.
Yes. For example, contributions to a 529 Plan and a Coverdell Education Savings Account are allowed in the same year for the same student.
Yes, but you may owe taxes and/or penalties. Any 529 Plan withdrawals that are not used for qualified education expenses are subject to federal and state taxes and a 10% penalty tax. If you withdraw money from a Coverdell Education Savings Account for reasons other than to pay for qualified education expenses, the earnings will be taxed at your ordinary income tax rate, which may be as high as 35%.
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If you plan to open an account to use exclusively for college expenses, a 529 Plan may be your best choice. A 529 Plan offers many benefits, including withdrawals that are free of federal income tax and penalty if used to pay for qualified college expenses.
You may want to consider a Coverdell Education Savings Account (CESA, formerly the Education IRA) if you also might use the investments for elementary or secondary school expenses. You can make tax-free withdrawals from a CESA for elementary, secondary or post-secondary (college) expenses.
The CESA has a low maximum contribution limit ($2,000 per year) compared to 529 Plans ($200,000-$325,000 lifetime limit). If you decide to invest in a CESA, you may want to consider supplementing it with a 529 Plan. You can contribute to both account types in the same year for your child, and you'll be able to invest more toward college and other education needs.
You have a couple of options if you want to invest in an account for multipurpose uses.
If you open an account under the Uniform Gifts/Transfers to Minors Act (UGMA/UTMA), the money in the account must be used for your child's benefit, whether for education or other expenses. The account will be registered in your child's name with you or another adult acting as custodian. Your child is the legal owner of the UGMA/UTMA investments and gains control of the account at a set age defined by your state (usually 18 or 21).
If you want the investments to be available for miscellaneous expenses and you want to maintain control of the account, you may want to consider opening a regular, taxable account in your name. This option allows you the most freedom with your investments; however, you lose the tax benefits that the other account options offer.
It's possible to use your traditional or Roth IRA investments for college expenses; however, this may not be the best option for you. Remember that investing for your retirement should be your primary goal when you open a traditional or Roth IRA.
IRA withdrawals for qualified college expenses are penalty free, but you will more than likely have taxes to pay. With a traditional IRA, you will be taxed on earnings and any deductible contributions that are part of your withdrawal. With a Roth IRA, you will be taxed on earnings unless you are age 59½ or older and the account is at least five years old.
Traditional and Roth IRAs allow you the benefit of investing for retirement and college in the same account. But you do not get to take advantage of the tax-free withdrawals offered by a 529 Plan and CESA or the tax benefits of UGMA/UTMA accounts, and you lose part of your retirement investments.
A 529 Plan offers you multiple tax-related benefits.
- You do not have to pay income taxes each year on the earnings in your account.
- When you make a withdrawal for qualified college expenses, you do not have to pay federal income tax on your earnings.
- If you contribute to a 529 Plan offered by your state, you may be eligible for a tax deduction or other benefit on your state income taxes.
The availability of tax or other benefits may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors. Non-qualified withdrawals are subject to federal and state income taxes and a 10% penalty.
Before investing, consider the investment objectives, risks, and charges and expenses associated with investing in 529 Plans. More information about 529 Plans is available in the issuer's official statement, and it should be read carefully before investing.
If you contribute to a CESA, you do not have to pay income taxes each year on earnings, and you also do not have to pay federal income tax when making a qualified withdrawal. However, contributions to a CESA are not tax deductible.
With a UGMA/UTMA account, a portion of the investment earnings may be exempt from federal income tax and the remainder may be taxed each year. Depending on the amount of earnings, some may be taxed at your child's tax rate and some at your rate. Contributions to a UGMA/UTMA account also are not tax deductible.
Yes. The Uniform Gifts to Minors Act and Uniform Transfers to Minors Act allow you to make a gift of securities (for example, mutual funds) to a minor. You may designate yourself or another adult as custodian to transact on behalf of the minor until he or she reaches the age of majority. The minor may not make investments.
The Uniform Transfers to Minors Act expands the scope of the prior law, the Uniform Gifts to Minors Act. Most states have adopted the Uniform Transfers to Minors Act, which replaces the Uniform Gifts to Minors Act in those states. When you open the account, we will register it under whichever act is effective in the state of residence of the donor/grantor, custodian or minor.
When the account is opened, the funds legally belong to the minor. The shares cannot be transferred into a trust or to any other person, including the custodian or a sibling, until the minor reaches the age of majority and chooses to transfer the shares himself or herself.
The minor will need a Social Security number in order for you to open an account. If the child does not have one, contact your local Social Security Administration office. After you receive the minor's Social Security number, send a completed account application to us along with your investment check.
We offer a variety of mutual funds, including domestic and international stock funds, balanced funds, bond funds and money market funds. Please review the appropriate fund's prospectus before investing.
No. The acts allow only one custodian and one minor per account in most states*. The custodian should, however, designate a successor to act on the account in the event of his or her incapacity or death. To designate a successor, simply complete a Designation of Successor Custodian form. To receive this form by mail, please contact us. It is not necessary to return the form to us. Please keep it with your legal documents.
*Tennessee allows two custodians for UTMA accounts.
The act requires the custodian to transfer the shares to the minor. To do this, the custodian must send us written instructions and have his or her signature guaranteed if the account is more than $100,000. The custodian must sign with the word "custodian" following the signature. After the account has been transferred, the minor is then able to conduct any type of transaction.
Most American Century Investments mutual funds require a $2,500 minimum initial investment. Please refer to the prospectus for specific UGMA and UTMA minimums.
It depends on your total investment balance. American Century Investments charges a $12.50 semiannual account maintenance fee to certain personal mutual fund investors whose total eligible investments are less than $10,000, including UGMA/UTMA* accounts. Total investments are based on the sum of accounts listed under your Social Security number. For UGMA/UTMA accounts, the investment is listed under the minor's Social Security number. The assets will not be included in the custodian's total investment balance when we assess the account maintenance fee.
*Online access is not available for UGMA/UTMA accounts if the minor has multiple accounts with more than one custodian. This protects the privacy of each custodian's information online. As a result, UGMA/UTMA accounts for which the same minor has more than one custodian are not are not subject to the account maintenance fee.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.