By saving a little each month, you will be prepared to help pay for tuition, books, room and board, and other expenses that will come up. There are two plans you can look into when you want to begin saving for college: Prepaid Tuition plans and College Savings plans.
While both college savings plans can help you pay for most college expenses, prepaid tuition plans allow you to choose from colleges that are located in your state of residence and lock into tuition rates or receive credits from participating colleges. If you want your child to attend a school that is close to home or just an hour or two away, consider one of these plans.
College savings plans offer you more options since you can choose any college your child wants to go to, but relies on investments in mutual funds and other money market accounts. While they start out as risky investments, as your child nears college age, the investments become more conservative. You can use the money in this plan to pay tuition, room and board, and other expenses associated with college.
If you are able to set some money aside each month for your child's college education, consider one of these college savings plans. But if you need the money to pay for other expenses like a mortgage and other living expenses, you may should put college planning on hold. Making sure your child has what they need while growing up and find a way to pay for college later. Visit RetirementSavingsGuide.com to learn more about college planning, retirement savings, and other ways to invest your money.
College Savings Plans Of
529 college savings plans allow parents, and in some cases grandparents and other family members, to contribute tax-deferred money to a savings account earmarked for college. The money gains tax-free interest and there is no tax assessed on the principle if it is withdrawn to cover eligible college expenses. The current tax rules will be in effect until 2010, but even if Congress does not reauthorize that section of the tax code, tax will still only be applied to the earnings on the account, not the principle.
Every state now offers a 529 plan and some offer more than one type. For example, some states like Florida offer prepaid plans that lock in today's tuition rates and also offer traditional savings plans. It is a misconception that signing up for a state-run college savings program requires your child to attend college in that state. All states have reciprocal agreements allowing participants to choose from a huge number of colleges all over the country. If you have chosen a prepaid plan, however, your child will only receive tuition at the rate you agreed to when you signed up regardless of what college they attend.
Coverdell education savings accounts work in a similar way to Roth IRA accounts. Parents can deposit after-tax income into an account to save for college or private school (one of the unique benefits of a Coverdell account). Any interest on the account is tax-free if withdrawn for eligible educational expenses. However, unlike 529 plans, Coverdell accounts are capped at $2,000 per child. Even if the child has accounts established by grandparents or other family members, the total invested in the child's name cannot exceed $2,000. For this reason, many families choose both a 529 plan and a Coverdell plan.
Also, since Coverdell accounts are held in the child's name, any funds not used for college will eventually be distributed to your child, not back to you. This is the opposite of 529 college savings accounts which are held in the parent's name and can be transferred to other family members.
Finally, the rules covering 529 plans are easier to understand than those covering Coverdell accounts. Families considering opening a Coverdell account should consider consulting with a tax professional to be sure they understand all the rules and tax implications.
Both Cecilia Ponz & Jonathon Hardcastle are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
