There is one thing that is becoming as certain as death and taxes; that is, the cost of a college education is growing fast in the United States. Thus, it is never too early to begin saving for your child of grandchild’s college.
The average estimated price for four-year college at an in-state university was $244,667 in 2020. For this reason, it is never too early to start saving. There are several ways to start savings for your loved one’s college, but not all savings plans are created equal. While there are several investment vehicles to choose from when developing a college saving strategy, this article will explore 4 different avenues.
529 Plan
A 529 plan is a state-sponsored way to save for college. Each state has structured these types of savings account a bit different, but every state offers one. But, you do not have to live in a particular state to participate in that states 529 plan. However, each might offer a home-state tax advantage for investing in the state sponsored 529 plan in the state you reside, so it is prudent to look into that. If you invest in a 529 plan, your investment grows tax-deferred, and the distribution to cover the recipients qualified college expenses comes out tax free.
- Anyone can open a 529 Savings account, and friends and family can contribute to the account without concerning which member opened it.
- A 529 plan has higher contribution limits than other types of education savings accounts.
- Lifetime contributions can total $400,000 or more per recipient.
- A very wealthy grandparent can supercharge someone’s 529 account by depositing up to $75,000 in a single year if special election is made.
Prepaid Tuition Plans:
Prepaid tuition allows you to pay for college at current rates, despite the day of attendance. You can lock in today’s tuition rate if you pre-purchased and select a university. These types of plans usually apply to several state universities. If the individual ends up going to college out of state or a private university, you can transfer the value of the account or receive a refund.
Coverdells
A Coverdell account, also known as Education Savings Account (ESA), allows you to contribute after tax dollar to grow tax free, and the money withdrawn by the recipient is tax free. Unlike a 529 Plan, these funds can also be used for elementary or high school. The max contribution is $2,000/year and funds must be contributed to the account before the recipient turns 18 years old. Additionally, the funds must be withdrawn before the recipient turns 30 years old.
Cash
While cash is king in most regards, there aren’t many advantages to just saving cash other than there are no restrictions on the use. This is important in the event your loved one chooses a path other than higher education. The annual exclusion allows anyone to give up to $15,000/year, in cash or other assets, (if filing with your spouse, the limit is $30,000), tax free to the recipient. You can gift your loved one up to $15,000/$30,000 per year of after-tax dollars and it will not be taxed to the recipient.
If you or someone you know would like more information related to savings for a loved one’s college, please reach out to our team. We are ready to help you.
