If you were fortunate, your parents wrote a big healthy check toward your college expenses and provided you with sound advice during your time in college. However, if you were anything like me, you may have been dropped off to college with only sound advice! And we all know, sound advice doesn’t pay for college!
But know, you can change the cycle. Whether you are a parent, expecting or just merely dreaming of your future offspring, it is no greater time than now to begin investing in your children’s future.
There are many steps you can take toward saving for your children’s education. Now more than ever, it is important to take advantage of tax advantaged accounts that may be available to you. Consider these education saving vehicles:
Section 529 Plan
A section 529 plan allows earnings to grow tax deferred and distributions for the purpose of paying education are tax-free. States and eligible institutions provide 529 plans. A 529 plan could be either prepaid or a contribution plan. A prepaid plan works just as the name implies, an individual can pay college tuition at today’s prices for the attendance in the future. Whereas a contribution plan works similar to your 401k plan – you have the option of contributing amounts to the plan with hopes to use the funds to pay for college expenses in the future.
The key advantages of the 529 plan, the earnings grow tax-free and the contributor may be eligible for a state deduction. Also, say for instance Junior decides to follow his dreams and become an NBA player, all isn’t lost! You can request to change the beneficiary to another child who has decided to go to college. Keep in mind, as long as expenses are utilized for qualified education expenses you are not taxed, however funds utilized for other reasons may be subject to penalties.
A Coverdell Education Savings Account provides another option to save for college. An individual is able to contribute $2,000 (2012) per individual towards college funding. Although the contributions are not deductible, just as 529 plans, earnings grow tax free if used toward educational purposes.
The key advantage of Coverdell ESAs – not only are distributions eligible for higher education expenses, but could also could be used for elementary and secondary education. For instance, if you incur costs for your children who are in elementary school, you may be able to utilize the Coverdell ESA to help pay for these expenses.
Keep in mind, unless Congress acts in 2013 contributions may be reduced to $500 per beneficiary and in addition, the expenses for elementary and secondary education may no longer be allowed.
Remember, your choice, your future!
Kemberley Washington is a certified public accountant and a business professor at Dillard University. Subscribe to her personal finance blog at Kemberley.com. Follow her on Twitter or connect with her on Facebook.