Many parents, grandparents and other family members want to provide a college education for their children. The Bureau of Labor Statistics noted lower unemployment and higher salaries are products of higher education meaning . Know the tax-advantaged alternatives to simply starting a savings accounts and the variety of options available to you and your child.
529 college savings plan
This plan typically serves as a savings account that also provides a tax benefit. According to The Wall Street Journal, when funding a 529 plan, you are charged the typical income tax. However, you will not pay taxes on the earnings built during the time you invest. This tax break is especially appealing when you begin investing early in a child's life.
These plans are unique to each state. Some offer one 529 plan and others offer multiple options.
You can choose from two major types of 529 plans. The prepaid option allows you to pay for a portion of tuition in advance. This provides you with the ability to lock in the current price of tuition. This is especially beneficial because the price of tuition has increased so drastically.
Investment plans are often the preferred choice. You can dictate how aggressively you invest. In addition, you can use this money toward different institutions.
U.S. News and World Report noted that the savings plan allows you to use your money toward most professional and trade schools, accredited universities and graduate schools. Educational expenses can also include, room, board and books.
Coverdell Education Savings Account
Only one parent, guardian or beneficiary may control a Coveredell ESA at a time, according to the IRS. However, anyone can contribute to a Coverdell ESA. You can open an account anytime before the beneficiary turns 18.
This option is a savings account that is exempt from taxes. However, if you do not use the earnings for qualified education expenses, tax exemption no longer applies.
Cash is the only type of contribution allowed and cannot exceed $2,000 annually. That limit applies to each beneficiary. If one child has multiple Coverdell ESA's, the total dollar value given to them cannot exceed that limit.
Use a Coverdell ESA before the beneficiary turns 30 unless he or she has special needs. The account may roll over to a younger sibling if he or she is younger than 30.
For more information about smart ways to manage your finances, contact Landmark Bank.
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