By the time the current toddlers step foot on a college campus, they might be spending half a million bucks to receive that degree. That’s why it’s never too soon to begin planning a college savings plan if you want to help your children with higher education expenses.
You’ll find there are many choices available to help you save, but what is the best one? The solution is that there is not any ideal answer, it all depends on your financial situation and the amount of flexibility you would like with your savings. Here’s what you need to know about three of the most popular ways to save for a college education.
THE 529 PLAN
A 529 plan comes in two basic types.
This straightforward plan allows you to buy school credits today which can be utilized in the future at a state school. In other words, it allows you to lock in tuition costs at the current rates. Generally, you or the child attending college will need to be a newcomer to participate in a state’s prepaid tuition plan.
This is actually the more popular kind of 529. You make contributions to the program and can pick from a variety of investment options that have the capability to grow and chemical for several years before beginning making withdrawals.
The attractiveness of a 529 college savings program over traditional savings is that the tax break. Should you apply the capital for qualified educational expenses, you will appreciate tax-free growth as well as tax-free withdrawals — which includes national and most state taxes.
And until recently, these instructional expenses were confined to college costs, but changes in federal laws now allow Americans to withdraw up to $10,000 per year to help pay for grade school or higher school tuition expenses.
Any adult can open a 529 plan, and also the owner of the account has ultimate control over the funds. Consequently, you’re free to change the beneficiary on the plan to any other qualifying family member.
Lifetime contribution limits for 529 plans are high — normally $235,000 to $520,000, depending on the strategy you pick. Each state offers its own plan, and you’ll be able to select to participate in any state’s plan. (Your state may, however, offer you specific incentives to choose its strategy, including possible tax deductions)
Watch out for withdrawals that aren’t used for qualified educational expenses. Such a distribution you take will be subject not only to regular income tax but also a 10 percent penalty on your earnings.
THE COVERDELL EDUCATION SAVINGS ACCOUNT
The Coverdell Educational Savings Account (ESA) is a different type of college savings account that you can open through a brokerage firm, bank, credit union or other financial institution.
As soon as you donate, you can pick from a wider variety of investments than you’d see in a 529 program — including stocks, bonds, mutual funds, ETFs, CDs and more. You’re also allowed to change up investments on your Coverdell ESA portfolio as often as you wish. (Using a 529 plan, you’re confined to two investment changes every year.)
While a 529 program allows you to withdraw funds for grade school and higher school tuition costs, a Coverdell ESA allows entry for any qualified expense at these grade levels, such as tuition, books, uniforms, supplies, etc..
And, being with a 529 plan, a Coverdell ESA offers special tax perks. While there’s no tax deduction for contributions, you will typically prevent taxes on funds you withdraw for qualified educational expenses. Using money for nonqualified expenses, though, will allow you to hit with the exact same 10 percent penalty and taxation bill that applies to nonqualified withdrawals from a 529 plan.
Contrary to a 529 plan, the Coverdell ESA caps contributions at only $2,000 a year per beneficiary. And, finally, your beneficiary must use the Coverdell ESA’s assets by age 30 — you are free, however, to change beneficiaries or roll the money into a 529 plan.
THE UGMA OR UTMA ACCOUNT
The Uniform Gifts to Minors Act (UGMA) accounts or Uniform Transfers to Minors Act (UTMA) account is not specifically made for school savings, but equally provide a few unique qualities that may make them attractive for this objective.
Any adult can open a UGMA or UTMA account. Check with your brokerage firm, bank, or credit union to commence the process. The accounts is structured so that assets in it are the property of a named small, with an adult custodian handling the funds until that child reaches adulthood.
The benefit of a UGMA/UTMA is the assets in the account can be used for whatever. There is zero penalty for withdrawing funds for non-educational expenses, however, the account’s assets may only be used to gain the minor named on it.
Unlike using a 529 plan or Coverdell ESA, there are no tax breaks involved. The assets in the accounts are also the property of the small, not the custodian, making them irrevocable. Last, the minor has total control over the accounts assets after he or she reaches a certain age (which can range from 18 to 25, depending on the condition ).
In the end, since the UGMA/UTMA assets belong to the minor, they’re considered more heavily than parental funds in regards to financial help. Keep in mind that your Expected Family Contribution worth, depending on the information that you provide on the FAFSA, will probably be greater when you save in a UGMA/UTMA instead of a 529 plan or Coverdell ESA.