College Education Plan: Saving for Your Child's Bright Future
Graduation season may have made you realize how quickly time can fly by until it’s your own children that are going off to pursue higher education. The earlier you begin putting money away for college, the more time you allow for it to grow. As college tuition prices continue to increase, you can never start saving too early. Continue reading to learn more about saving for your child’s bright future and education.
Savings Account Options
There are several different account options for education savings.
529 Plans
529 plans are one of the most common types of education savings accounts. Typically, each state has their own type of 529 plan that you can sign up for. One of the positives is you are able to choose any state’s 529 plan, not just the state that you reside in, so you can choose the plan that has the best benefits.
Most states allow the contributions made to a 529 plan to be made with a tax deduction as a way to encourage parents to save for their childrens’ education. However, the main stipulation is that the funds within the account can only be utilized for qualifying education expenses, including tuition, fees, student loan payments, off-campus housing, campus meal plans, books, and technology school supplies. Any withdrawals that are made for expenses that are not a qualified education expense will have to be taxed as a penalty.
Another benefit of 529 plans is the ability to transfer the name of the account to another person. If you have a college fund set up for a child that chooses to not seek higher education or has funds left over in the account after going to college, you can change the beneficiary to another family member. The family members include: a child of the initial beneficiary, sibling, parent, step parent, niece or nephew, aunt or uncle, an in-law, the spouse of a family member, or first cousin.
Education Savings Accounts
Another tax-advantaged option for college savings is education savings accounts (ESAs). ESAs function similarly to 529 plans by the funds only being able to be withdrawn tax free for qualifying education expenses. Any withdrawals that are made for expenses other than education costs will be subject to taxes.
For Coverdell ESAs, there is an annual contribution limit of $2,000 for each beneficiary. However, these accounts have income restrictions for only certain families to utilize these accounts. These income restrictions are based on a family’s adjusted gross income (AGI). For single taxpayers, the AGI limit is $95,000 a year but for married taxpayers, the AGI limit is $190,000 a year. Above these income limits, the contribution limit lowers as the taxpayer’s AGI increases.
As for beneficiaries, if there are unused funds within the ESA by the time the beneficiary turns 30 years old, the funds need to be rolled into another ESA or a 529 account, or change the beneficiary on the ESA.
Saving Tips
Invest what you are able to afford. Based on your monthly budget, determine a contribution amount that works for you, your family, and your finances.
Consider using bonuses or tax returns to boost your children’s college funds. A large on time contribution could help significantly increase the earnings that your account grows over time.
Have relatives chip in with contributions. For birthdays and other holidays, encourage your family members and loved ones to also make a contribution to your children’s college funds to maximize the allowed contribution amounts.
Enlist the help of a financial advisor. A financial advisor can help you define a path of your finances so you and your family are able to save for your children’s education in a way that works best for your financial state.
By starting to save for your child’s education early, you can help ease the future burden of student loans in higher education. Enlist the help of an experienced financial advisor to stick by your side while developing the financial side of your education plan. Our team at Mooney Lyons is happy to assist in reaching your financial goals, including your children’s education plan. Schedule a consultation with us today to get started.
Sources:
https://www.bankrate.com/loans/student-loans/unspent-coverdell-esa-options-limited/
https://www.investopedia.com/terms/c/coverdellesa.asp
https://www.investopedia.com/terms/1/529plan.asp
https://mint.intuit.com/blog/college-savings/childs-college-education-savings/
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