Which tax-advantaged college savings plan is right for you?
There are two main types of tax-advantaged college savings programs designed to aid parents in financing education costs. Those programs are: 529 Plans and Education Savings Accounts (Coverdell Accounts)
Both programs offer tax-deferred growth, as long as the funds are used to pay for qualified education expenses (Tuition, Books, Supplies, and Room and Board). If used for qualified education expenses, all funds including gains can be withdrawn tax-free. Both programs are considered assets of the owner and not the child, which greatly reduces any impact on financial aid availability.
However there are some important differences between 529 Plans and Educations Savings Accounts.
Key Features of 529 Plans
Anyone can open a 529 plan.
Anyone can contribute to the plan regardless of who the owner is.
No income limits on opening/funding 529 account.
Withdrawals can be used for any qualified education expense from K-12th grade, as well as any qualified secondary institutions.
529 Plans have higher contribution limits than other types of education savings accounts.
Owner has control over assets and can change beneficiary at any time.
May qualify for state tax deduction for participating in home states plan.
Key Features of Education Savings Accounts
Must have an Adjusted Gross Income of less than $220,000 if married to be eligible to open an ESA. (AGI of less than $110,000 for individuals)
Contributions are limited to $2,000 annually until the beneficiary reaches age 18.
The total account must be liquidated or rolled over to another family member by age 30 to avoid taxation and penalties.
Matthew Stutes, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is not a guarantee of future results. All investing involves risk including loss of principal. Securities offered through LPL Financial. Member FINRA/SIPC
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