In the college savings game, all strategies aren’t created equal. The best savings vehicles offer special tax advantages if the funds are used to pay for college. Tax-advantaged strategies are important because over time, you can potentially accumulate more money with a tax-advantaged investment compared to a taxable investment. Ideally, you’ll want to choose a savings vehicle that offers you the best combination of tax advantages and flexibility that meets your overall investment needs. We’ll give you a brief overview of three popular options to save for college.

529 plans

Since their creation in 1996, 529 plans have become to college savings what 401(k) plans are to retirement savings—an indispensable tool for saving money for a child’s or grandchild’s college education. That’s because 529 plans offer a unique combination of benefits. There are two types of 529 plans: savings plans and prepaid tuition plans.

529 savings plans
The most popular type of 529 plan is the savings plan. A 529 savings plan is a tax-advantaged savings vehicle that lets you save money for college and K-12 tuition in an individual investment-type account, similar to a 401(k) plan. These plans offer a unique combination of features, including federal and state tax advantages, high contribution limits and no income limit on participation. Some plans let you enroll directly, while others require you to go through a financial professional.

The details of 529 savings plans vary by state, but the basics are the same. You’ll fill out an application, name a beneficiary, select one or more of the plan’s investment portfolios and make an initial cash contribution. Then, you can make contributions to the plan up to the annual limit.

529 prepaid tuition plans
Prepaid tuition plans are cousins to savings plans—their federal tax treatment is the same, but their operation is very different. Instead of choosing an investment portfolio, a 529 prepaid tuition plan lets you prepay tuition at participating colleges, typically in-state public colleges, at today’s prices for use by the beneficiary in the future. Prepaid tuition plans are generally limited to state residents, whereas 529 savings plans are open to residents of any state. Prepaid tuition plans can be run either by states or colleges, though state-run plans are more common.

Coverdell education savings accounts

A Coverdell education savings account (Coverdell ESA) is a tax-advantaged education savings vehicle that lets you save money for college, as well as for elementary and secondary school at public, private or religious schools. You’ll name a beneficiary, who must be under age 18 when the account is established (unless he or she is a child with special needs). Then, you can make contributions to the account, subject to the maximum annual limit ($2,000 in 2020), and invest the money as you wish. Contributions grow tax deferred, and money withdrawn to pay college or K-12 expenses is completely tax-free at the federal level (and typically at the state level too). If the money isn’t used for college or K-12 expenses (called a nonqualified withdrawal), the earnings portion of the withdrawal will be taxed at the beneficiary’s tax rate and subject to a 10% federal penalty.

Not everyone can open a Coverdell ESA. To make a full contribution, single filers must have a modified adjusted gross income (MAGI) of less than $95,000, and joint filers must have a MAGI of less than $190,000.

U.S. savings bonds

Series EE and Series I bonds are types of savings bonds issued by the federal government that offer a special tax benefit for college savers. The bonds can be easily purchased from most neighborhood banks and savings institutions, or directly from the federal government. They are available in face values ranging from $50 to $10,000. If the bond is used to pay for qualified education expenses and you meet income limits (as well as a few other minor requirements), the bond’s earnings are exempt from federal income tax. The bond’s earnings are always exempt from state and local tax.

How to choose the right plan

Navigating the particulars of saving for a college education can feel overwhelming, and there’s so much information out there that you may not be sure what’s right for you. That’s where our team of Financial Advisors comes in!

Questions? Contact a CFS Financial Advisor.

Grow has contracted with CUSO Financial Services, L.P. (CFS) to provide investment services, and your CFS Financial Advisor will help you build a plan that meets your needs. The advisor will look at your current spending, saving and investing, learn about your goals and priorities, make objective recommendations and support your efforts moving forward through the implementation and management of your plan.

Schedule a Complimentary Consultation

Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members. For specific tax advice, please consult a qualified tax professional.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020.

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