Get a jump on college tuition by starting early and saving regularly. Here are some options to help you save now for your child's bright future.
529 Plan
Also called a qualified state tuition plan, a 529 can be opened by anyone — parents, grandparents, other family members, friends — who want to help pay a child's higher-education expenses. The plan invests in mutual funds or similar investments. Annual after-tax contribution amounts are generous: up to $85,000 per individual or $150,000 per married couple. However, contributions do fall under federal gift tax rules. Earnings grow tax-deferred and are withdrawn tax-free as long as the funds are used to pay for qualified education expenses, including school fees, tuition, books, supplies, and room or board at most accredited U.S. college, graduate school, community college or vocational school. Keep in mind that if withdrawals from a 529 are not used for qualified educational expenses, the earnings portion will be subject to income taxes and penalties.
Coverdell Education Savings Account
Coverdell Education Savings Accounts work like 529s, as the earnings on after-tax contributions grow tax-deferred and withdrawals are tax-free when the money is used for qualified educational expenses. In addition to expenses for higher education, certain expenses for kindergarten through grade 12 are also considered qualified. Contribution limits are lower than a 529: $2,000 a year is the maximum amount you and others may contribute per child. If the child has multiple Coverdells, the amount contributed to all of them can't exceed $2,000. Contributions must be made before the student turns 18. Parents or guardians may open Coverdell accounts if their modified adjusted gross income, or MAGI, is below $110,000 for individual tax filers, or $220,000 if filing jointly, and anyone can contribute to them as long as their income falls under the MAGI limits. Like the 529, if funds aren't used for qualified educational expenses, the earnings portion will be subject to income taxes and penalties.
College Saver
The College Saver is a 12-month Share Certificate for children younger than 18 that offers a fixed rate and low opening balance of $200. It renews every 12 months until the child reaches age 18.
Roth IRA
A Roth IRA is a great way to save for retirement. Contributions are made with after-tax dollars and can be withdrawn at any time for any reason without taxes or penalties. Typically, the earnings are taxed and penalized if withdrawn before you turn age 59 ½ or if the account has been opened for less than five years. However, Roth withdrawals made before you turn 59 ½ and used for qualified higher-education expenses will not be subject to an early distribution penalty. You will still owe income taxes on the earnings, and the account must still meet the five-year minimum requirement. Depending on your MAGI, if you're younger than 50, you may contribute up to $6,500 a year to your IRA, and $7,500 if you're older than 50.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.