If you have children, they need college funds. Each year the cost of college tuition and other college expenses increases, making it more and more difficult for you to fund your children’s education. The key to being able to put your children through college is starting a college fund early in your child’s life, so that the money has time to grow. A tax fee savings account for college is the best way to go.
There are several type of tax free savings accounts you can use for college. The most popular are 529 accounts. Money that you deposit into a 529 account is money you’ve already been taxed on. However, you won’t pay taxes each year on the interest the money earns. In addition, with a 529 plan, you won’t pay taxes on the money when it’s withdrawn, provided you use your withdrawals only to pay for qualified college expenses, such as tuition, books, room and board.
There are other types of tax free savings accounts for college, including the Coverdell Education Fund. This account works much like a 529 tax free savings account for college, but there are some important differences.
First of all, with a 529 tax free savings account for college, your maximum contribution in a single year is as much as $200,000. With a Coverdell account, the maximum contribution amount each year is just $2000, which is not much if you’re getting a late start on college funding. However, with a 529 plan, you must have a money manager, and with a Coverdell fund, you’re in control of the investments. Assets in a Coverdell fund belong to the student, which can reduce the amount of financial aid a student can receive. However, money in a 529 plan belongs to the account owner. If you set the account up in the name of the parents, the amount in the account does not affect financial aid.
Finally – and this is a big one – money set aside in a Coverdell account belongs to the student and is controlled by them once they turn 21. They can spend the money to go to school, or to buy a Harley and ride it across country. With a 529 plan, the contributor (meaning you, the parent) has control over the money. In addition, with a 520 tax free savings account, if Junior decides to forego the college education for that ride cross country on a Harley, you can redirect his college funds to his education minded little sister. Only you can decide which type of college fund is best for your child. The most important thing is that you do something – before it’s too late.