Even though college might still be a ways away, budgeting and saving is always relevant. Before application season descends upon your household, start preparing to see what you can do to financially prepare for the hefty cost of college by looking into the different types of college savings plans available to you.
529 Plans
Legally known as “qualified tuition plans,” 529 plans are offered in all fifty states as well as the District of Columbia, according to this Investor Bulletin on the U.S. Securities and Exchange Commission’s website. There are two types of 529 plans, the first being prepaid tuition plans and the second being education savings plans.
With a prepaid tuition plan, you can typically make an agreement at a public, in-state university to pay the current prices for credits, essentially locking in the price. This agreement almost always comes with residency requirements and usually cannot be applied to room and board. An Education Savings Plan works like an investment account, and whatever you save up in your account, you can use toward qualified higher education expenses such as tuition, room and board.
The fees and expenses associated with both types of 529 plans depends on the state and federal laws, but an Education Savings Plan typically has more fees associated with it, such as annual account maintenance fees on top of enrollment and application fees. One way to decrease the cost of fees include looking into direct-sold plans which saves you any additional fees that would normally come to a broker.
This article on Savingforcollege.com also offers seven benefits of taking up a 529 plan and also provides more information about the plans in a less-legal jargon format compared to the Investor Bulletin linked above. Benefits include tax breaks and flexibility, so it’s definitely worth your future to take a look at these two types of plans.
Coverdell Education Savings Account
For those familiar with Roth IRAs, a Coverdell Education Savings Account is the educational funds equivalent of a Roth IRA. Coverdell ESAs are only available to families who fall under a certain income level. As the contributor, your modified adjusted gross income must be less than $190,000 or less than $95,000 for single filers in the year of the contribution, according to this article on Savingforcollege.com that goes more in-depth into eligibility requirements for Coverdell ESAs.
Julia Kagan from Investopedia also reviewed an article that includes the definition and specifics of a Coverdell DSA. Kathryn Flynn also goes further and lists five mistakes that can occur with a Coverdell ESA in this article on Savingforcollege.com.
With so much to consider in these plans (from saving limits to tax policies to fees and expenses), it’ll certainly pay to do your research. Luckily, there are plenty of others out there who have done research already and compared the different types of college savings plans.
Ken Clark from The Balance has an article focused on how to choose the most suitable college savings account, and Robert Farrington from The College Investor also has an article discussing both 529 Plans and Coverdell ESAs along with a third possibility — a Uniform Gifts to Minors Act. Schwab MoneyWise has a short and simple article comparing 529 Plans and Coverdell ESAs. For more personalized guidance in terms of specific savings plans, head to Savingforcollege.com’s interactive page to choose and compare three saving options and select three features in saving plans that are important to you.
Simplify the world of saving for college by educating yourself on the different savings plans offered by your state and the federal government. Start saving early and learn from other parents’ mistakes by reading through their accounts. With all this information in tow, you’ll be on your way to ensuring that bright future for your student is within financial reach.