With the trend of college tuition increasing rapidly an effective investment saving plan for your childs education is becoming more important than it has ever been in the past. Many parents will find that their future college costs will be much more than they have saved for their childs college education. This leaves many kids to be faced with financing a portion of their college education with financial aid. This article will look at the advantages and disadvantages of 3 common college savings options. Additionally, this article will also explain which of these 3 options are the best if your kids college education is to be funded by financial aid.
529 College Savings Plan: A 529 plan allows just about everyone to save for their kids college education and it is a fairly new option for allowing your college savings to grow tax free. Perhaps the most important benefit of a 529 plan is that your investment earnings grow tax free if you use the funds for qualified education expenses. Another big advantage is that the maximum amount you can contribute to a 529 savings plan can go as high as hundreds of thousand dollars depending on your States guidelines. If for some reason you do not use the investment funds for college, you can still withdrawal your investment earnings, but you will have to pay a federal penalty of 10% and federal income taxes on your earnings. The penalty can be waived if your child receives a college scholarship, or in the event your child becomes disable or dies.
A 529 plan can typically be easily purchased through an investment broker or mutual fund company. Please be aware that one of the biggest disadvantages of a 529 plan is that investment options can sometimes be limited however that is likely to change as they become more popular. One last main advantage of a 529 college savings plan is that the money in the plan is classified as a parents assets so less that 6% of the value counts against your kids eligibility for financial aid.
Coverdell Education Savings Account (CESA) (formerly known as an Educational IRA): A Coverdell Education Savings Account is a savings account created as an incentive to help parents save for college education expenses. A Coverdell Education Savings Account is easy to set up at most financial institutions. The main difference between a Coverdell Education Savings Account and a 529 plan is that with a Coverdell Education Savings Account you can only contribute $2000 per child per year and to qualify your adjusted gross income must be less than $110,000 if you are single and less than $220,000 if you are married filing jointly. For financial aid eligibility a Coverdell Education Savings Account is classified as a parents asset so less that 6% of the value counts against your kids financial aid eligibility.
Taxable Investment Accounts: A taxable investment account is just a regular account that earn taxable interest, or investment income. Taxable investment accounts can be a broker account, a mutual fund, a certificate of deposit or just a regular savings account. The biggest disadvantage to taxable accounts in saving for college is that they offer no tax advantage for college savings. The biggest advantage of taxable investment accounts is that they offer lots of flexibility, and are easy to set up at any financial institution. Lastly a taxable investment accounts are classified as a parents asset so they do not count as a huge negative in the financial aid formula.
Overall, a college saving plan can be a important decision for parents to consider. The above 3 investments can be highly beneficial if used correctly in the college planning process.