If you’re finding it increasingly difficult to save for you or your child’s college education, you’re not alone. What used to be much more practical and achievable has become any student or parent’s nightmare — oftentimes preventing the child from pursuing a higher education.
Throughout history, the savings plans and accounts available for students and parents to fund their college education has become extremely confusing. While there are plenty of quality options available, many parents are left scratching their head at the possibilities.
Don’t worry, we’re going to help you make sense of all the jargon and fancy language behind these college savings plans — including the Coverdell ESA, Section 529 Plan, and U.S. Savings Bond.
Understanding Coverdell ESAs
The first tax-advantaged college savings account is called the Coverdell ESA. It’s a great option for those that won’t have a lot to contribute, but want the freedom of choosing what the money is used for. Believe it or not, a Coverdell ESA can be used for college, elementary, or secondary school.
In order to apply at a financial institution, the child would have to be under the age of 18 at the time of the application. In addition to that, there may be fees involved depending on the institution. Once the beneficiary is chosen, contributions can’t exceed $2,000 per year — no matter where the contribution comes from.
The good thing with the contributions is they grow tax-deferred. You won’t need to pay income taxes and qualified withdrawals can be initiated tax-free. Unfortunately, a non-qualified withdrawal would be taxed and would also incur a 10% federal penalty.
Coverdell ESAs are only available to individuals making less than $95,000 per year and couples making under $190,000.
Understanding Section 529 Plans
The second tax-advantaged college savings account is a Section 529 Plan. Originally created nearly 25 years ago, Section 529 Plans are often compared to a 401(k) retirement plan. There are two main types of Section 529 Plans — college savings and prepaid tuition. Below, we’ll be looking at the college savings plan.
Sponsored at the state level, most Section 529 Plans are different in their own way (depending on the state you live in). The good news is Section 529 Plans all work under common principles and offer a wide range of benefits for college students and their parents. The application process will be similar to a Coverdell ESA, but some states allow you to enroll directly.
When it comes to a Section 529 Plan, there are no income qualifications that need to be met — meaning anyone can sign up for one. Contribution limits aren’t monitored each year, but rather hold a lifetime contribution limit of anywhere from $250,000 to $400,000. The larger contributions are what make this an attractive account for college, rather than elementary or secondary school.
Adding to the excitement, Section 529 Plans are subject to state tax deductions as well — in some states. You’ll get to choose any state’s plan, whether you’re living in it or not.
Since 2017, individuals can contribute up to $14,000 per year and married couples are allied to contribute up to $28,000. As far as withdrawal, you’re allowed to give the beneficiary up to $80,000 per year (individual) or $160,000 per year (couples). If you were to lose money in this saving plan, you can write the loss as a miscellaneous deduction.
Understanding U.S. Savings Bonds
The final tax-advantaged college savings account we’ll discuss is a U.S. Savings Bond — which you’ve likely heard of, but know nothing about. Although the government has issued 13 different types of saving bonds, the two that are currently available to individuals are the Series EE and Series I.
The great thing about these U.S. Savings Bonds are that they provide a unique tax benefit for anyone looking to save for college. A savings bond can be purchased at a bank, financial institution, or through the government, but it must be an amount between $50 and $10,000.
Using the bond for educational purposes will always result in being exempt from local and state taxes, but further requirements must be met before being exempt from federal income tax.
Since 2017, it was announced that individuals must have a modified adjusted gross income of $78,150 or less in order to purchase the bond. As for couples, their MAGI can’t exceed $117,250.
Setting Your Child Up for Success
Now that you have several different tax-advantaged college savings accounts to consider, you can start to put your family in a quality position for future success. Of course, you won’t want to just pick any college savings account — you’ll want to choose the right one for your situation.
If you’re having extended difficulty picking the right one, contact us at United Business Owners Solutions today for help! Our experienced team of professionals is ready to assist you while you are aiming for a bright future of your child.