“According to the College Board, the average cost of tuition and fees for the 2017–2018 school year was $34,740 at private colleges, $9,970 for state residents at public colleges, and $25,620 for out-of-state residents attending public universities.” 1
If you are looking into opening up an account for your child to help save some money for their college expenses you have come to the right place. There are 2 main accounts you can use to reach your goal. I will go over both of them at a basic level and explain some pros and cons of each.
But first I wanted to point out the similarities of both accounts and the advantages of using either one of them to bolster your saving for a college fund. Either of these accounts would be better than just opening up a savings account at a bank because of the potential growth and the tax advantages.
Both plans offer the same federal tax advantages. The advantage is similar to a Roth account in that you get the qualified distributions tax free when you take them out. The money must be used to pay for qualified education expenses; if it is not, then taxes are charged and a 10% penalty takes effect. The taxes and penalty are only on the growth(interest) in the account, not the principle. If your child decides not to go to college you can roll the money over to another child or another family member.
Coverdell Education Savings Account (ESA)
A Coverdell Education Savings Account is another way for you to save for education expenses with its main selling point being the opportunity to invest how you like.
- They are not just offered by the states, but they can be opened up by most investment companies.
- You can choose how you want your money to be invested and are not limited in this.
- You can use the money not only for continuing education, but also for any K-12 expenses.
- Has a $2000 per child contribution limit per year.
- You cannot contribute if your income is over $220,000 (married filing jointly) 3.
- Must contribute only before the child turns 18.
A 529 plan is a state specific plan that allows for you and to contribute to a college fund with no contribution limits.
- You can contribute as much as you would like each year
- There is no income limits for being able to contribute.
- The State may also offer specific state tax deductions. Idaho does.
- Can be opened for anyone at any age.
- Very few investment company options that are selected by the state
- Limit to the type of investments you can have
- Cannot use your money for public K-12 education expenses.
- Must pay a gift tax if you contribute over $30,000 in one year (married filing jointly)
After looking at both types, we can see some advantages to both. Which one you choose depends on your income, your family, and your investing preferences. If you are not planning on investing more than $2000 per year per child and your income qualifies, then it would probably be advantageous to open up an Education Savings Account. With this you will have the freedom to invest in a prudently diversified investment portfolio that you wouldn’t be able to find with a 529 plan.
We offer Education Savings Accounts, or could lead in the right direction at getting set up with a 529 plan.
By Jimmy Hancock