College Savings Plans – Why You Need One
Much like saving for retirement, saving for college has become a topic of much discussion, and sometimes, of much stress. There is good reason for this, as the cost of higher education has been increasing for as long as we can remember. Indeed, even if your son or daughter is planning on attending a state school, and not a private school, the cost of tuition, board, supplies and everything else may add up to tens of thousands of dollars a year. However, saving for college need not be complex or stressful. You will be pleased to know that there are several programs available for you to start saving for your child’s university tuition, and also, that there are tax benefits to some of these programs.
A qualified tuition program, also known as a 529 plan, is one of the most common ways to save for college. One of the biggest benefits of a 529 plan is that the earnings in the plan accumulate tax-free and are also not subject to federal or state taxation when they are used for eligible college expenses. In addition to this, the contributions can be deducted on your state tax return. And, to further sweeten the deal, there are no income restrictions on the individuals who decide to contribute to this plan. It is important to keep in mind, however, that contributions to this type of plan are only limited to qualified educational expenses of the beneficiary of the account.
There are two types of 529 plans: education savings plans and prepaid tuition plans. A savings plan allows the accountholder to contribute money to the plan, which usually consists of investments made to a series of mutual funds. Withdrawals from the 529 savings plan can be used for both K through 12, and college expenses. A 2019 law, known as the SECURE Act, expanded tax-free 529 plan withdrawals to include registered apprenticeship program expenses as well as up to $10,000 in student loan debt repayment for both the account beneficiaries and their siblings.
A prepaid tuition plan, on the other hand, is only offered by a limited number of states and some higher educational institutions. These plans generally allow you to “lock in” the tuition at current rates for a student that may not be attending college for years to come. Prepaid tuition plans can also grow in value over time and the money that will eventually come out of the account to pay the tuition is not taxable. However, unlike the savings plans, the prepaid tuition plan is not available for the K through 12 years. Also, prepaid tuition plans do not cover expenses such as room and board. In addition, prepaid tuition plans may have other restrictions such as which particular institutions they may be used for.
Another type of college savings plan is a Coverdell education savings account (ESA), which is a custodial account set up solely for paying qualified educational expenses for the beneficiary of the account. Like a 529 plan, the ESA can be used for paying for college expenses as well as qualified elementary and secondary school expenses. However, the biggest difference between an ESA and a 529 plan is that contributions to the ESA are not tax-deductible. Additionally, there are income limits when contributing to such a plan, and, the total contributions in any given year on behalf of a beneficiary cannot exceed $2,000. The distributions from the ESA are tax-free to the beneficiary, so long as the distributions do not exceed the qualified educational expenses.
Whatever plan you happen to choose, as with any kind of investing strategy, make sure that you get an early start so that you will have more money saved up for your children when they get to college age. This is even more important when you are an expat, as these sorts of considerations may get overlooked while are you busy living it up in an exotic foreign location and far away from the U.S. If you have children and you wish to save for their higher education expenses, please get in touch with us today to discuss the options you have available to you with 529 plans and ESAs.