Saving & Investing
We all want the best for our children and grandchildren. When we think about what we can do to help them, paying for their education often comes to mind. Having four children of my own, I often think to myself, how am I going to afford their education someday if prices continue to climb? You are also probably aware that you need to start saving now if you want to have the necessary funds available to pay those large tuition bills down the road. So how do you get the most out of your money when you start saving? Here are some of your options.
A 529 plan is perhaps the most common and popular way to save for a child’s education. It offers some tax advantages and the potential to earn interest on your account. When you open a 529 plan you make after-tax contributions to the account. That money is usually invested in low-risk opportunities or age-based portfolios and can earn a modest return. Withdrawals used for qualified education expenses are federally tax-free; non-qualified withdrawals may result in a federal income tax and a 10% federal tax penalty. Tax treatment at state levels may vary. You should consult your tax advisor before investing.
Every state has at least one type of 529 plan and each state has different investment portfolios for their plans. You can apply for any state’s plan, no matter where you live. So, you may want to do some research on the plans to see which ones have the best performance when it comes to a return on your investment. *
Before investing in a 529, investors should consider whether their or their beneficiary’s home state offers any state tax or other benefits such as financial aid, scholarship funds and protection from creditors that are only available through their home state’s qualified tuition program.
Coverdell Education Savings Account (ESA)
This is another plan designed specifically to pay for educational expenses. Like the 529 plan, it allows for tax-free investment growth and tax-free withdrawals when the money is used for qualified educational costs. However, unlike the 529 plan, this plan gives you more flexibility to use the money for K-12 expenses.
When you open a Coverdell ESA, you have the option to self-direct your investments. Some people like that option, others would rather have professional help. You also have limits on the amount of money you can contribute, and there are some income limitations as well. Your contributions cannot exceed $2000 annually for each account you establish in a child’s name. Also, if married, your adjusted gross income cannot exceed $190,000. That amount is $95,000 if you file your taxes as a single. If your income falls between $190,000 and $220,00 ($95,000 and $110,000 for single filers) you can still contribute, but the maximum amount is phased out as your income amount increases.
This option also offers a tax advantage for savings. The tax breaks are not as significant as other plans, but there are also fewer regulations on how the money is used. If you put money into a custodial account, the earnings are taxed at the child’s tax rate, which is normally much lower than the parents’ rate. Individuals can contribute as much as $15,000 per year, while couples can contribute $30,000 a year without paying a gift tax.
There are many other options to consider when you plan to save for a child’s education, including prepaid tuition plans, savings bonds, and traditional savings accounts. 1st Source Wealth Management has helped many clients develop successful savings strategies and we would love to help you. Please feel free to call me at 574-271-4249 or send an email to [email protected].
*Past performance does not guarantee future results.
Prior to investing in a 529 Plan, investors should consider whether the investors or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
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