While a lot of people don't like to think about college planning, it is never too early to create a solid college savings plan. There are multiple college savings accounts that you can take advantage of from a 529 savings plan to individual, private college savings accounts.
We help simplify the process of college planning by creating a step-by-step process that helps our clients step back from the process and concentrate on the stage of savings they are currently in. In the same way you cannot attempt to build a retirement plan a year before retirement, the best college savings plans are crafted early in the life of your child.
Our goal is to help our clients sort through their options as we guide them gently through the stages to help save time and capital. We can discuss various college savings strategies and offer recommendations based on the needs of your daily and your individual goals. Whether you are looking at private or public college options, a college savings plan that starts now is the best way to ensure financial security once you hit the college years.
College Savings Account Options
There are two primary types of college saving accounts that offer tax advantages to parents that want to finance their children's education in advance. Most parents are familiar with the college 529 plan or have at least heard a 529 savings plan mentioned in passing, but education savings accounts also referred to as ESAs or Coverdell accounts are also an option.
The benefit of choosing either an ESA or a 529 savings plan is that both offer tax-deferred growth and can be used to fund a variety of educational expenses including expenses, room and board, supplies and even computer purchases. The major benefit of choosing either is that any money that is withdrawn from these accounts is considered tax-free. In addition, since both plans are considered to be assets owned by the parent and not by the child, it does not significantly hurt a child's chance of also receiving financial aid if they are eligible.
529 plans can vary regionally since they are administered and regulated on an individual basis, but every state offers some type of 529 savings plan with the same intent -- to help parents fund their children's education without paying large amounts of taxes on their savings.
While you are not obligated to invest in the college 529 plan, meaning you could in theory invest in a different state's 529 plan, there are often state tax benefits along with a host of other local benefits that come with investing in your home state's 529 savings plan. For this reason, most people tend to choose their home state's 529. This is one of the many reasons why we suggest talking to a professional advisor about your options because they can help you navigate the process.
One of the benefits of a 529 plan is that it can be opened by anyone, and friends and family are welcome to contribute to the plan. There are no income limits for this type of college savings plan and withdrawals can be used to pay for anything related to education. Those pursuing private education often enjoy the fact that the 520 plan offers larger contribution limits than most other comparable college savings accounts.
An Education savings account is another option available to those with an AGI of less than $220,000 per year. For single parents, income is capped at $110,000. The lower income limits prevent many from taking advantage of this college savings plan, which is one more reason why 529 savings plans are more popular. Contributions are capped at a maximum of $2,000 per year and the account must be fully drained by the time the beneficiary reaches age 30, although it may be rolled over into a sibling's ESA.
Not sure how to open a 529 savings plan, or if a college 529 plan is going to be the most profitable investment route for you? Funding a child's education is a complex and intricate process, it is best to embark on this journey with a qualified professional by your side. Contact one of our college savings plan financial advisors today for help with this journey.