There are three main methods of saving for college expenses:
The taxable account is the least preferred method of the three because gains may be taxed each year and there may be capital gains taxes due when sold.
Education Savings Accounts (ESA) grow tax deferred and subsequent distributions are tax free for qualified expenses, but ESAs have limits to the annual contributions allowed ($2,000 per year per beneficiary) as well as income limits for contributors ($190,000 to $220,000 phase out period for married filing joint and $95,000 to $110,000 for all others). ESAs can be used for elementary and secondary expenses in addition to post-secondary education expenses.
Section 529 Plans are sponsored by individual states. The assets grow tax deferred and subsequent distributions are tax free for qualified expenses (post-secondary only). There are no income limitations and each state may or may not have tax incentives for their program. The Commonwealth of Virginia allows for a $2,000 state income tax deduction for each account per year.
Most Section 529 state college savings plans allow parents, grandparents, other relatives, and friends to contribute to a child's higher education fund. Grandparents can set up and manage accounts in the same manner as parents. The contributor makes decisions concerning pre-paying tuition or choosing investment options, and retains ownership of the contract or account until it is used to pay the child's college expenses.
Why save for a child's post-secondary education?
According to the College Board, the average cost of a four-year education at a public university is currently $42,544, and $107,416 for private colleges. Over the past decade, expenses at public institutions have increased nearly 40%, and costs will almost certainly continue to rise. So it is very important that families think about these costs while children are young. By starting to save today, parents and grandparents can help their loved ones have the resources necessary to attend college.
How can you begin to save for a child's college education?
Section 529 state college savings plans allow grandparents or others to set aside funds for the express purpose of paying for a child's future education. The plans provide tax benefits and offer the opportunity for long-term growth. They allow donors to maintain control over the funds until they are needed, and ensure that the money will only be used for higher education-related expenses. By setting up a savings plan and making regular contributions, you can help your student deal with the significant costs of college.
What needs to be done before starting an account?
The first thing to do is research the various plans currently available. There are many options available, and each plan is unique. Savers should look for the investment strategies, tax benefits and other incentives that best suit their needs and those of the beneficiary. Often, a person's home state will offer a plan with advantages that other plans do not have.
What about state prepaid tuition programs?
The prepaid programs offered by individual states vary greatly. Virginia's prepaid program has some very serious limitations that need to be considered before making a decision. Also, prepaid tuition programs pay for tuition only, which is approximately half of the total cost of college. Call or email for more information.
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