If you want to give your children a head start in saving for college, there are a variety of ways to do it. For example, you can open a savings account or start investing money in stocks. Both can be done in your name or the name of your child.
Another option is to choose a plan of tax benefits, which can often help you build savings more quickly. These plans include any type of investment account or a plan that is tax-exempt, tax-deferred or offer other kinds of tax benefits.
Both plans popular college savings tax benefits are eligible tuition programs, commonly called QTPs or 529 plans and Coverdell education savings account.
How do the plans
With the Coverdell ESA, the money is deposited in the account for you save for college, then later withdrawn for educational expenses.
In the case of a 529 plan, you can choose between two options. The first option allows you to put money in the box and remove money for education spending, as you would with an ESA. The second option is to open a prepaid 529 plan, which allows you to record training credits to use when it comes time for college.
Contributions to both plans are nondeductible
Unfortunately, you can not deduct contributions made to each type of savings plan.
So when is the tax advantage kick? Once you need to make a payment for tuition and fees, you do not have to pay tax on withdrawals. This also applies to the interest or other earnings in the account if you use withdrawals for qualified expenses studies.
The same goes for prepaid 529 plans, education credits used for education expenses are tax-exempt.
Who owns and controls the plan?
With a 529 plan, the account must be in your name, not your child. This gives you more control and flexibility. You also do not have to specify what the child account will be used for. And, if you have a family emergency, you have access to funds if you need them.
The opposite is true for Coverdell ESAs. The account must be in the name of the designated beneficiary, not yours. However, this does not mean you're out of luck if plans change.
For example, if the designated beneficiary decides not to go to university, and your other child has his eye on medical school, you can choose to change the beneficiary without tax penalty.
The only requirement is the new beneficiary must be a family member of the recipient.
What are the contribution limits?
One drawback plans ESA is that you and all other contributors, such as grandparents, can invest $ 2,000 per year for each child. Because of this restriction, ESAs are not the best route if you get a late start saving for college expenses.
Furthermore, 529 plan contribution limits are determined by the state in which the account is held. The limits vary, but in general, you can contribute as much as you want to the plan.
Please note the limitations of income
Any contributions to or withdrawals from a 529 plan are not limited by the level of income.
With a Coverdell ESA, however, contribute to the account is limited if you are in a higher income tax bracket. Contributions to a Coverdell ESA are beginning to remove the modified adjusted gross income level (MAGI) of $ 110,000 ($ 220,000 if married filing jointly) for 2016.
This means that you can not invest in the account if your income is over this amount in dollars.
ESAs are not just for college
an advantage to an ESA plan is that you are allowed to make tax-free distributions for some elementary and expenditure of secondary education, such as tuition, fees, books and supplies.
A 529 plan is for college expenses only. You can not use it for the costs of primary or secondary education.
Have you calculated how much you expect to be saved for the education of your children when they are ready for college?
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