Smart planning helps the math add up.
Education is one of the biggest expenses an individual can incur during a lifetime. If you want to fund a child’s future college education without financial strain or significant debt, it will take careful planning to save the money you need. The right choices will likely depend on a combination of available savings methods, as well as the length of time before you need to pay tuition. There are several plans that may help you tax-efficiently save for education expenses, including:
529 College Savings Plans
Section 529 college savings plans are established and maintained by state governments or agencies or eligible educational institutions. Investing in a 529 college savings plan is a simple, tax-advantaged investment vehicle for college savings. Anyone can contribute to a 529 plan and may want to consider the benefits of doing so, including:
Funds from a 529 plan can be used to pay for college tuition, room and board, computers, supplies and special needs equipment.
Up to $10,000 per year per beneficiary may be used for primary and secondary education.
Earnings are exempt from federal taxes and withdrawals are tax-free when used for qualified education expenses.1
Plans typically have high lifetime contribution limits, and investment minimums are low.
A 529 plan is portable and open to residents and nonresidents alike. If you don’t like your state’s plan, you can take advantage of a 529 plan in another state.
You can change beneficiaries without penalty; for example, from a son to a daughter or from your child to a grandchild.
There are generally no age restrictions or income limitations on a 529 plan. Adults can even set up a plan for personal use.
Account holders may withdraw, without penalty, up to $10,000 per beneficiary from a 529 plan to pay student loans, with certain conditions.
Effective January 2024, a lifetime maximum of $35,000 of unused 529 account funds may be rolled over to a Roth IRA (specific restrictions apply).
To learn more about your state’s 529 savings plan, visit the “Find My State’s Plan” page at collegesavings.org. Check the box to the left of the plan you are interested in to find additional details and contact information.
State-sponsored 529 Prepaid Plan
State-sponsored 529 Prepaid Plans — sometimes referred to as Guaranteed Savings Plans — allow you to prepurchase future tuition (only) at a predetermined rate today for a specific in-state institution. Contributions may be made in installments or a lump sum. The accounts grow tax-deferred and withdrawals are tax-free as long as the funds withdrawn are used for college tuition. Once the child reaches college age, the plan pays out based on the tuition rates at the time of distribution. A limited number of states and the Private College 529 Plan offer prepaid tuition plans. To see the list of states offering prepaid tuition plans and details on each, see “Your Guide to 529 Prepaid Tuition Plans” at collegesavings.org.
Coverdell Education Savings Accounts
The Coverdell Education Savings Account (ESA) is an attractive education savings vehicle for families who meet the annual modified gross income (MAGI) limits. Even if you contribute to a 529 plan, you are permitted to contribute to a Coverdell ESA — up to $2,000 annually per child. Except for special needs’ students, the beneficiary must be under the age of 18 in order to open an account. Savings in a Coverdell ESA may be used for qualified higher education expenses and elementary and secondary education expenses. These include tuition, books, supplies, equipment, tutoring and special needs services connected with an eligible school.
Contributions to the account are not tax deductible, but distributions used to pay qualified education expenses are tax-free.2 The account must be fully withdrawn by the time the beneficiary reaches age 30 (excluding special needs). If not, any remaining funds distributed will be subject to tax on the earnings and an additional 10 percent penalty. For more details, visit savingforcollege.com.
With each type of plan, there are advantages and disadvantages. Our advisors can explain each and help you determine how much you will need to save based on your priorities and personal situation. They can help you access the plan or plans appropriate for your individual situation.