Education Planning, Financial Planning, Saving Money

Saving for College: 529 or Coverdell

Sally Says..
Sally Says…

Ahh, College , the best 6 years of my life.

“Mr. Blutarsky Zero.Point. Zero”

College, Academia, Halls of Ivy………Lets look at the 2 main tax preferential vehicles for saving in order to send our young pups off to college to work on their Instagram & Selfie skills

529 College Saving Plan & The Coverdell Education Savings Account

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A 529 plan is a college savings plan operated by a state of institution to help you fund a college education. You’ll find each state has its own plan and some are with Fidelity, Vanguard, T. Rowe Price, etc..

Benefits of a 529 Plan:

• Grows tax-free and will not be taxed  if  money is taken out to pay for qualified college expenses.

• Some states offer tax breaks.

• You, as Parent or Grandparent, remain in control of the account while the child is the beneficiary.

• 529 plans have no income limits, age limits or annual contribution limits ( as compared to a Coverdell ESA)

You can put a ton of $$ into theses plans, anywhere from $235,000 – $400,000.

 

Downsides of 529 Plans:

• The fees are typical high

• Flexibility: if junior decides he’d rather surf and work in a food truck, getting at the money involves taxes and  a 10 percent penalty.

▪ You can typically only do one or two allocation changes a year

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Financial Aid impact: while the FAFSA sees it as parents asset where only 5.64% of the parents assets are considered, there are some schools, typically private, that count it as the childs asset where the number is 20%. You want the lower %!!!!!


A Coverdell Education Savings Accounts (ESA)

One of the big differences from the 529 is if you want to start saving for elementary school, high school or college, a Coverdell is one of your best options.

  • Tax-free earnings growth and tax-free withdrawals when the funds are spent on qualified expenses. Boom!
  • More investment options and sometimes lower fees than 529 plans.
  • Money left in the account when the student turns 30 must be withdrawn within 30 days.
  • Unlike the 529, there are income limits. If your adjusted gross income is $110,000 or more ($220,000 if filing a joint return), you would not be eligible to use a Coverdell ESA at all.
  • If the child owns the account, it will count as their asset for financial aid (20%)

 

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You first need to ask yourself can I even afford to help Junior go to college. Secondly, what if he/she decides not to attend. And lastly, you can’t borrow to retire, but your kid can borrow to go to college.

Visit SavingforCollege.com, a great resource on 529 plans. Enjoy.