Education Savings Account vs. a 529 Plan
There are several options when saving for your children’s college expenses. It’s important to understand them and choose what’s best for you. Along with regular savings options, First Source offers a New York State 529 College Savings Plan, and a Coverdell Education Savings Account. What is a 529 plan? The 529 Savings Plan is a good option if your children are relatively young, you’re going to commit to saving regularly, and you have the time (you start early). The 529 plan has a higher contribution limit of $10,000/year, and anyone can contribute. Let’s say it’s your child’s birthday: all party attendees could give money as a gift toward this account.
How does a 529 Plan work?
In a 529 Plan, your account earnings grow without you having to pay federal taxes on them, and some states (like New York) have other tax benefits as well. When your 529 funds are withdrawn and used for education, the funds are tax-free (with some restrictions). And you don’t have to use them only as savings for college; covered expenses also include private elementary or secondary school tuition. If you want to withdraw the funds for something other than education, that’s ok, too, though you will have to pay taxes and fees. Find more information online at nysaves.org.
What is a Coverdell Education Savings Account?
The Coverdell Education Savings Account is a good option for a family on a tighter budget. You can contribute up to $2,000/year, and any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions. Contributors must contribute by the due date of their tax return (not including extensions). The funds can be used for either college or private schools, and cover a wider range of K-12 expenses. The funds must be used by the time your student reaches age 30, unless there is a special needs situation. No states currently offer state tax deductions for Coverdell accounts. Ask us for more details if you’re interested in a Coverdell account.
Choosing a College Savings Plan
There are advantages for each type of account, and many people even save using both Coverdell and 529 accounts. Live Smarter by making an appointment today to meet with one of our Financial Services Representatives to discuss your best college savings plan approach.