Once you start to accumulate money for
a child’s education, several tax-advantaged options enable you
to keep more of the money. Look at the chart below to see
how they compare.
Tax rules that apply to college savings options are
complicated. Before investing, you may want to check with
your base financial office or tax adviser about the tax consequences
of investing in any of these options.
| |
529 College
Savings Plans |
Prepaid Tuition Plans Offered by Public and
Private Colleges and Universities |
Coverdell
Education Savings Accounts (ESAs) |
Custodial
Accounts |
Savings
Bonds |
| Who Owns/Controls the Plan |
Contributor |
Contributor |
Contributor |
Custodian (can be the contributor), until child reaches
age of majority (usually 21) |
Contributor |
| Investment Choices |
Typically, plans provide several investment options. |
None |
No restrictions |
No restrictions |
Savings bonds |
| Expenses Covered Besides Tuition and Fees |
Qualified education expenses for higher education. |
Usually only tuition and mandatory fees. |
Qualified K-12 or higher education expenses. |
No restrictions |
Tuition and mandatory fees for higher education and contributions to 529s and
ESAs. |
| Contribution Limit |
Varies by plan. Most permit total contributions in
excess of $200,000 per beneficiary. |
Set by the terms of the contract. |
Maximum contribution $2,000 per beneficiary per year; may be less, depending
on income. |
No limit |
No limit |
| Federal Tax Advantages |
Earnings grow tax deferred and are tax-free if used
for qualified education expenses. |
Earnings grow tax deferred and are tax-free if used
for qualified education expenses. |
Earnings grow tax deferred and are tax-free if used
for qualified education expenses. |
$750 in earnings are tax-free. |
Interest grows tax deferred and is tax-free if used
for qualified education expenses. |
| State Tax Advantages |
Varies by state; some states permit a tax deduction
for contributions, tax-free earnings growth, and tax-free
withdrawals for qualified education expenses. |
Varies by state; some states permit a tax deduction
for contributions, tax-free earnings growth, and tax-free
withdrawals for qualified education expenses. |
None |
None |
Interest is usually exempt from state and local taxes. |
| Income Restrictions |
None |
None |
Single taxpayers must earn no more than $110,000.
Couples must earn no more than $220,000. |
None |
To qualify for some tax advantages:
Single taxpayers must earn no more than $70,750; couples must earn no more than $113,650. |
| Penalties for Non-Qualified Withdrawals |
Earnings taxed as ordinary income; may be subject to
10 percent penalty. |
Earnings taxed as ordinary income; may be subject to
10 percent penalty. |
Earnings taxed as ordinary income; may be subject to
10 percent penalty. |
None |
Interest earned is taxed as income. |
Today’s college costs
seem so high that you might wonder if you can ever afford
to pay future college costs for your children. Don’t
be discouraged. According to the FINRA's “
