If you’re going to help your child pay for college, you might as well do it in a way that will benefit you come tax season. Here are four ways to fund college and benefit all parties involved.
This is a tax advantaged savings plan that allows you to contribute a large amount of money towards an education fund. Families can put up to $15,000 per year towards the future college costs of your beneficiaries. Any money you withdraw from this account is free from federal income taxes as long it’s spent on qualified expenses. Most states will also allow you to make tax free withdrawals as well. Keep in mind that there are two kinds of 529 accounts- the college savings plan account and the prepaid tuition account. Do your research to find out which one is the best fit for you.
IRA/ Roth IRA
An IRA is a tax advantaged savings account that allows you to purchase stocks, bonds and mutual funds in order to grow your money over time. You get to choose the investments and can make changes as needed. You can withdraw money from your IRA or Roth without being charged a 10% tax as long as the money is being spent on qualified educational expenses. The money must also be used by yourself, your spouse or your children in the year the money is withdrawn.
If you’ve never heard of a Coverdell account, it’s another great option. An article written by Jean Folger for investopedia.com states, “A Coverdell Education Savings Account (ESA) can be set up at a bank or brokerage firm to help pay the qualified education expenses of your child or grandchild. Like 529 plans, Coverdell ESAs allow money to grow tax-deferred and withdrawals are tax-free at the federal level.
The article elaborates further by saying, “Coverdell ESA contributions are not deductible, and contributions must be made before the beneficiary reaches age 18. While more than one Coverdell ESA can be set up for a single beneficiary, the maximum contribution per beneficiary—not per account—per year is limited to $2,000.”
Custodial accounts are also known as Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. They allow you to put money or assets in a trust for a minor child. You maintain control until the beneficiary turns 18-21 depending on your state. At that time, they will own whatever is in the account and can use it on anything they desire. It doesn’t have to be used solely for educational purposes. There are no limits on contributions; however, to avoid the gift tax, it’s a good idea to keep the yearly amount under $15,000.
Help your child pay for college in a way that makes sense for both of you. Research the above mentioned methods for saving and start putting money towards education as soon as possible.