- Income grows tax deferred. You will not pay federal or state taxes on the amount you set aside each month in these plans.
- Distributions are not taxed federally. When you draw funds out of these plans, the money you draw out is not subject to federal income tax.
- The owner of the account stays in control. Your student cannot just draw out funds for some other purpose; the parent (or grandparent or other person who owns the account) makes the decisions about how and when it is used.
- Plan assets are professionally managed. Rather than putting your college funds into a certificate of deposit or the stock market, the 529 plan is managed by professional investment managers.
- Savings is comparatively painless. Once you enroll and authorize automatic deductions, the deposits come out automatically in the way your specify. You can kick back, relax and watch the fund build.
Coverdell Education Savings Account. These accounts are available through a variety of financial institutions. The main features of an ESA are:
- Up to $2000 per year can be set aside; the contributions are not tax deductible, but interest earned is
- Contributions can be made until the student beneficiary reaches 18
- Funds can be used for college, but they can also be used for eligible expenses for primary and secondary school years as well
Roth IRA. The Roth IRA is mainly a retirement savings account, but proceeds can be used for educational expenses for the IRA owner, spouse or children. Contributions to the Roth IRA, like the ESA, are not tax deductible, but all interest earned is tax free. You can contribute up to $4,000 per year into a Roth IRA. Again, you will want to use Roth in conjunction with other plans.
Regular Savings. Many parents set up a regular savings account at their bank or credit union for college savings. This is a very flexible approach as there are no limits on how the funds are used. But with that flexibility comes the lack of any tax advantages.
Painless Savings. There are a number of programs offered currently that allow you to get credits for purchases you make on your credit card or in other ways that accumulate college savings. These include:
- BabyMint. When you join BabyMint, you receive rebates from BabyMint affiliated retailers and rebates on the use of their MBNA BabyMint credit card.
- EdExpress. Joining EdExpress costs $24.95 per year, and you can earn rebates from selected retailers and e-retailers. EdExpress also has a number of research tools for college students and parents for learning about various colleges and universities and finding scholarships and grants.
- UPromise Like BabyMint, when you sign up for UPromise and use your credit card at selected retailers, rebates can be applied to a 529 college savings plan.
Summary
The most important part of saving for college is setting your goal and planning to achieve it. By taking a realistic look at your college expense needs and identifying a balance between funding and savings resources, you can be prepared for the time when your child enters college and begins his or her preparations for a rewarding education and career.
