Let’s take a closer look at two of your education savings options.
Start saving early for your child’s education. The sooner you start saving, the more opportunity your money has to grow. 529 college savings plans and Coverdell Education Savings Accounts (ESAs) are two options that offer tax-advantaged ways to save. Here’s a closer look at each.
529 College Savings Plan
In these tax-advantaged accounts (usually sponsored by states), contributions grow tax-free, and withdrawals for eligible college expenses (such as tuition, room and board, and books) are tax-free. Check your state’s plan to see if you can also take advantage of a state tax deductions.
Tips: Withdrawing money for other purposes (for instance, if your child doesn’t attend college), you generally pay income tax and a 10 percent penalty on earnings. If your child does not attend college, roll over funds in their 529 plan to a sibling’s without penalty.
Coverdell ESAs
Funds in these accounts grow tax-free and are tax-free when withdrawn for K-12 or college education expenses before age 30. ESAs also offer increased flexibility. Investment options are virtually limitless, and you can make investment changes at any time.
Contributions are limited to $2,000 a year per child. You’ll be subject to the same taxes and penalties as a 529 plan if the funds aren’t used for eligible expenses. The ability to contribute is subject to income limits, but children also can contribute on their own behalf.