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Education Planning

As a caring parent, you want the best for your children, especially when it comes to their education. However, with the cost of higher education steadily on the rise, you may have concerns about paying for the quality education your children deserve.

For the 2018-2019 school year, the average cost of tuition and fees was $10,230 at a four-year public college for an in-state resident and $35,830 at a four-year private college, according to the College Board. The figures above do not include other costs your child will incur as a college student, such as room and board, books, supplies, and equipment.

529 Savings Plans and Coverdell Education Savings Accounts offer you two excellent ways to accumulate assets for projected higher education costs.

529 Savings Plans
A 529 Savings Plan is a type of plan named for the section of the IRS Code where the plan is explained. These plans offer estate planning advantages, and their tax benefits were enhanced by the 2001 tax law changes.

Here are some of the key benefits:

  • Contribution limits are extremely high. Depending on your state of residence, you may be able to contribute more than $300,000. Some states even allow you to take a tax deduction on your contribution.

  • All earnings in a 529 Savings Plan accumulate free from immediate taxation. As long as the money is used for qualified education expenses, it can be withdrawn free from federal taxation. “Qualified education expenses” includes tuition, fees, books, and room and board at eligible higher education institutions, or up to $10,000 in annual tuition at eligible elementary or secondary schools.

  • Most plans offer a great deal of flexibility, from making investment choices to changing your beneficiary to determining how to spend the assets.

  • A 529 Savings Plan has no annual income eligibility limits.

Coverdell Education Savings Accounts
Another good tool to supplement your education savings is the Coverdell Education Savings Account (ESA), formerly the Education IRA. Characteristics of the Coverdell ESA include:

  • Maximum annual contribution of $2,000 per child.

  • The beneficiary of the account must be under the age of 18 at the time of the contribution.

  • You have the flexibility to invest in a wide range of financial products, including mutual funds, individual stocks, and bonds.

  • If needed, you can access your assets to pay for elementary and secondary school expenses.

  • All earnings grow federal tax-free for as long as they remain in the account.

  • If assets are withdrawn for "qualified expenses," you do not have to pay any income taxes on those earnings. Qualified expenses refer to tuition and fees and educational-related expenses, e.g., the cost of uniforms, supplies, books, etc.

  • Contributors must have less than $190,000 in modified adjusted gross income ($95,000 for single filers) in order to qualify for a full $2,000 contribution. The $2,000 maximum is gradually phased out if your modified adjusted gross income falls between $190,000 and $220,000 ($95,000 and $110,000 for single filers).

  • Having a 529 Savings Plan does not preclude you from establishing a Coverdell Education Savings Account, provided you meet the eligibility requirements for the Coverdell.

  • Your contribution goes into an account that will eventually be distributed to your child if not used for college. You cannot simply refund the account back to yourself like you can with most 529 plans. This means you lose some degree of control.

In addition to opening a Coverdell or 529 Savings Plan, consider establishing a regular investment account for college planning and contribute to it regularly, such as monthly or quarterly. Contributing regularly enables you to enjoy the benefits of compounding, one of the fastest ways to build wealth over time. Compounding is the amount earned on your original principal plus income, capital gains and/or accumulated interest reinvested.

For more information about the Coverdell Education Savings Account or the 529 Savings Plan, call your Financial Advisor today. He or she will help you create the college-planning strategy that best suits your financial needs.