Get educated on the pros and cons of college savings plan options
Choose the right education savings option now to help your kids have what they need when college rolls around.
With the rate of college tuition increasing at twice the rate of inflation, saving for college is more important than ever. Luckily, there are several smart savings options available to help you get started and enjoy some tax breaks along the way. Here’s what you need to know to get educated on college savings plans and choose the option that works for you.
Prepaid 529s and Savings 529s
529 plans are sponsored by states, state agencies, or educational institutions. They allow you to save up to the amount necessary to pay for qualified education expenses of the beneficiary and withdraw your money tax-free for to pay those education expenses. Plus, there are no income limitations or age restrictions. There are two types of 529 plans: pre-paid tuition plans and college savings plans:
Prepaid 529 Plans
- PROS: Allow you to lock in future tuition at today’s rate, so you don’t have to worry about increases in tuition down the road. Instead, you purchase credits for education costs and select a school from a list established by the state. Some educational institutions now also offer these types of plans. These types of plans guarantee that the value of the plan will increase at the same rate as the increase in tuition.
- CONS: Plan dollars must be used at eligible public or private colleges as determined by the state where the plan is created. If you contribute to a plan offered by a specific institution the funds can generally only be used at that institution.
College Savings 529 Plans
- PROS: You can typically choose from several investment options to fit your individual risk tolerance and goals, and use your funds at any accredited school.
- CONS: Because your plan covers tuition at the tuition rate that applies when the beneficiary goes to college, there is no built-in protection against inflation or tuition increases.
Qualified expenses that can be paid with 529 Plan dollars:
- Tuition and fees, books, supplies, and equipment required by the institution for enrollment or attendance of the designated beneficiary.
- Computer technology, equipment and internet access if it is used by the beneficiary and his or her family during the years of attendance at an eligible educational institution.
- Expenses for special needs assistance for special needs beneficiaries
- Room and board expenses for beneficiaries enrolled at least half-time, but only to the extent that it is not more than the greater of:
- The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance for the academic period – this is generally the amount included for financial aid purposes
- The actual amount charged by the eligible educational institution if the beneficiary lives in housing owned or operated by the institution.
Coverdell Education Savings Accounts (ESAs)
Coverdell ESAs are tax-advantaged accounts that allow you to save money for education. The earnings are tax-free if used for qualified education expenses. Contributions to a Coverdell ESA aren’t deductible, but money deposited in the account grows tax-free until you withdraw it.
- PROS: Distributions and earnings are tax-free if income criteria are met and the money is used for qualified education expenses. And, unlike 529 plans, ESA dollars are not limited to college expenses. They may also be used for eligible elementary and secondary education expenses.
- CONS: To contribute to an ESA, you must first meet income qualification criteria. Also, the amount you can put away is subject to contribution and age restrictions. To learn more about qualification details, visit the IRS website.
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