3 Ways to Save for College
A top of mind topic this time of year is “Planning for College”. College costs continue to rise and the amount of debt students assume is astounding. The most recent figures around student loans in America has climbed to $1.4 trillion1 and the average debt for a college graduate is $37,172 2
So what can you do to help your future college graduate receive an education and not be straddled with debt? Here are three vehicles to help you save and in some cases receive a tax break.
- 529 College Savings Plan
- Contributions are made to a tax-deferred account that can be withdrawn tax-free for higher education expenses such as tuition, room & board, books & supplies, etc.
- Pennsylvania offers a state income tax deduction on contributions
- The Contribution limit in PA is $14,000 per year per person. Between two parents, they can contribute $28,000 per child per year
- Allows 5 years of contributions in one year, which means one parent can contribute $70,000 (5 x $14,000) at one time in one year
- Ability to change beneficiaries, so if you do not use all of the funds for one child you can transfer to another or save for a grandchild
- On withdrawals for non-qualified expenses, the earnings are subject to ordinary income tax plus a 10% penalty
- Education Savings Account (ESA) or Coverdell
- Can save $2,000 per year per child
- Investments grow tax-deferred and qualified withdraws are Tax-Free
- Can be used for expenses for K-12 as well as college
- Income limits may restrict the ability to contribute
- Uniform Transfer/Gift to Minors Act (UTMA/UGMA)
- No limit on contributions
- Taxable custodial account controlled by the contributor until the beneficiary reaches either age 18 or 21 depending on which account you setup
- Once of age, the beneficiary can use the funds as they wish, so if you want the monies to be used for college you might want to consider a different option
- These accounts are the beneficiary’s asset for financial aid consideration
- May be subject to taxes if investment income exceeds certain amounts
It’s never too early to start saving for college.