With the continued rising costs of post-secondary education, be it a trade school, a junior college or a private college or public university, it is never too early to save for the future, particularly when it comes to your children’s education. According to investment giant, Fidelity, most parents begin to save for their children’s future before they reach first grade. Starting early can make a difference, both in terms of the money you contribute over time and its potential to grow.
While saving for college may seem like a practice designed only for those with discretionary income, it can be affordable for parents if they take advantage of accounts with special tax structures. Three kinds of education savings accounts help make the most of your money when saving for the single purpose of funding the future education of your children or grandchildren.
529 savings plans are flexible, tax-advantaged accounts designed specifically for education savings. Earnings on contributions grow federal income tax-deferred, and withdrawals taken to pay for qualified higher education expenses such as tuition, fees, and room and board are free from federal income taxes.
- Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA)
UGMA/UTMAs are custodial accounts that let parents (and others) make an irrevocable gift to a minor that can be used for college or any other purpose. For federal tax purposes, investment earnings are generally taxed at the minor’s tax rate, which is usually lower than a parent’s rate.
- Coverdell Education Savings Account (ESA)
Coverdell ESAs allow you to save for college and withdraw money for qualified higher education expenses federal income tax deferred. However, the annual contribution limit is only $2,000 per beneficiary and higher-income households may not be eligible.
These three types of accounts can propel your savings goals for your children’s education. Start saving as early as possible, even if the amount is $10, $25 or $50 a month. If you treat college savings like any other bill, you can be prepared when it is time for your little ones to go off to college or training.
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