There are three basic tax advantaged vehicles to help save for college: 529 plans, Coverdall Education Savings Accounts and Roth IRAs.
Saving for college? Consider three tax advantaged tools to help fund your child’s or grandchild’s education: 529 plans, Coverdall Education Savings Accounts and Roth IRAs.
A recent Forbes article, titled “How to Save for College,”reports that each of these plans allows the funds to be used for college tuition and fees, and some also permit the funds to go towards books and room and board expenses. In addition, the Coverdall accounts allow you to use the funds to pay for K-12 schooling. 529 plans have the fewest restrictions and so the broadest appeal.
Each state and DC have their own plans, and the plans may differ in terms of how your contributions are managed, the types of investments they offer, and the fees charged. Your contributions to 529 plans are with after-tax dollars, and 34 states and DC also offer a state income tax deduction for contributions to the plan.
Regardless of the state, the 529 plans come in two basic types—savings plans and prepaid tuition. With a savings plan, you deposit funds, make investment decisions, and watch the funds (hopefully) grow. Later they can be withdrawn for qualified educational expenses when your student begins college.
Prepaid tuition plans are offered by 12 states. These are similar to defined benefit plans, except it is for college rather than retirement. You pay in an amount today or over a certain period of time, and the plan guarantees payment for a certain number of years of college tuition.
One prepaid plan not offered by a state is the Independent 529. This plan is offered by a group of 270 independent colleges and can be used to attend one of those schools. These prepaid plans lessen investment risk by giving you a tuition guarantee: regardless of investment performance or increases in tuition, the agreed-upon part of your student’s tuition will be there when your student’s ready.
The article admits that it can be very complicated, but a college education is the best investment you can make in your student’s financial future. Speak to an experienced estate planning attorney to find out more.
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Reference: Forbes (January 20, 2015) “How to Save for College”