Advantages and Disadvantages of College Savings Accounts
Category : Finance | 1288 views | 2007-05-14 22:35:02
College is expensive and the options available to save for it are many. How do we know if as a parent, grandparent, or legal guardian of a child that we are investing in our childs future in the most effective way with the least amount of tax burden? Unlike money in a parent, grandparent, or legal guardians name, money invested in a childs college savings account such as a 529 Qualified Tuition Plan, a 529 Prepaid Tuition plan, or an Education Savings Account (ESA) like a
Coverdell can be allowed to gain interest federal tax-free.
In addition to offering a tax break by avoiding capital gains taxes, a college savings account allow some states to allow prepaid tuition plans, with or without limits on how much of the investment will receive a tax break. Additionally, withdrawals made for qualified higher education expenses do not incur any taxes or penalties through the Internal Revenue Services. Non-qualifying expenditures may avoid penalties under special circumstances such as receiving a scholarship, or in circumstances of disability or death.
529 Qualified Tuition Plans or 529 Prepaid Tuition Plans are not the only options for future-conscious investors to save for their childs education. Other options include the Coverdell Education Savings Account which not only can it be used on college expenses but also on qualifying elementary and secondary school expenses without penalty. Like the other plans, the Coverdell Education Savings Account does penalize for non-qualifying expenditures.
Most 529 College Savings Accounts as well as the 529 Prepaid Tuition Plan do not have residency restrictions. However, in some states, either the student beneficiary or the account contributor must live in the same state the college savings account, prepaid tuition plan, or educational savings account was established.
The significant disadvantage to using a 529 plan or other ESA is the total contributions limit compared to a lack of the same on a traditional or non-educational savings account. Depending on the state from which the 529 or ESA account was purchased, maximum contributions must be under $300,000 in total for a 529 college savings account or $2,000 annually for a Coverdell ESA per beneficiary. Additionally, select plans may also have limits on how much of an annual gift to an educational account can be considered for a deduction in taxes.
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