You dream of watching your children cross the stage in caps and gowns to receive their college degrees—and you know getting them there will require saving for tuition.
Research shows that less than half of the 72 percent of parents who have started saving for college have opened dedicated savings accounts.
You could stash money in a separate bank account to cover college costs but there are advantages to opening a tax-advantaged college savings plan.
We’ve broken down the basics of the two available plans — the 529 and Education Savings Account (ESA) — to help you decide which option to use to finance higher education.
529 Plan: A 529 is a state-sponsored plan that offers tax-advantaged investments to cover the cost of higher education. Each state offers at least one 529 plan; the costs of plans, investment selections and features differ from state-to-state. It’s possible to invest in a plan in another state.
ESA: ESAs are also called Coverdell education savings accounts, and they are a tax-advantaged investment used to fund education. Contrary to a 529, withdrawals can be used for qualified elementary and secondary school expenses as well as college costs.
529 Plan: Each 529 plan establishes its own contribution limits. The maximum contributions can be as high as $300,000 per student. You can make a one-time contribution of $65,000 ($130,000 for a couple) without incurring taxes for the gift under certain rules.
ESA: The maximum contribution for a Coverdell savings account is always $2,000 per year from birth to age 18.
529 Plan and ESA: Contributions are not tax deductible; the contribution is considered a gift. Withdrawals for qualifying educational expenses are not taxed.
Impact on Financial Aid
529 Plan and ESA: Funds are considered assets of the parent/account owner.
529 Plan and ESA: Funds can be used to cover tuition, fees, books, computers and other supplies and room and board as long as students are enrolled at least part-time.
529 Plan: None
ESA: Contributions must be made before students turn 18; funds must be used before age 30. Funds can be rolled over to another ESA for a different family member.
529 Plan: None
ESA: Accounts are only available to couples with modified adjusted gross incomes less than $220,000 (or $110,000 for single filers).
529 Plan: Each program has its own investment strategies: Some offer the flexibility to choose investment portfolios; others direct funds in a single portfolio.
ESA: You can choose the investments within the ESA portfolio and can transfer funds between different investments within the company.
Withdrawal for Non-educational Expenses
529 Plan and ESA: Funds withdrawn for non-educational uses are subject to federal tax and a 10-percent penalty.