3 Ways to Save for Your Kid’s Education
Over the years, the monetary gifts your kids get from friends and relatives can add up! Combine that with contributions from you, and that can become a helpful way to fund college tuition and other educational expenses. For parents or guardians looking for ways to save money for your kids, we have three ways you can invest funds: custodial savings accounts, 529 plans and Coverdell Education Savings Accounts (ESAs).
1. Custodial Savings Accounts
Custodial savings accounts are a type of savings account that you (the custodian) open and manage for your kid (the beneficiary). These accounts offer several benefits, including funds being FDIC insured and a monthly interest rate to help your child’s savings grow.
Custodial savings accounts are popular because they don’t have:
Once your kid turns 18 (or 21 in some states), the account can be turned over to them to use for wherever life takes them next.
While there are accounts that offer tax benefits, custodial savings accounts do not. In fact, your child could have to pay taxes on the interest if it exceeds a certain threshold. Colleges and universities may also take these account balances into consideration when evaluating financial aid applications.
2. 529 College Savings Plans
A 529 college savings plan is a tax-advantaged investment account that you can open for your child, but they are the controller of the funds. These accounts can be opened by parents or anyone who wishes to contribute to your child’s future education expenses. Many 529s can be used to pay the full costs at any accredited college or graduate school in the U.S. or abroad, while others are sponsored by specific state or in-state public colleges that let you prepay tuition expenses at a current rate for future use.
The primary advantage of 529s is that they offer tax benefits, including tax-free withdrawals for qualified education expenses and that the earnings in the 529 grow tax free. Because a 529 is an investment account, the funds can be rolled into stocks, bonds, mutual funds and other investment vehicles that can generate higher returns. Unlike custodial savings accounts, earnings in a 529 plan aren’t guaranteed if your investments don’t perform as well as anticipated.
Excitingly, the federal government now allows unused 529 funds to be rolled into a Roth investment retirement account (IRA) for the beneficiary, meaning idle funds (up to a limit) in a 529 plan can ultimately help pay for your child’s retirement.1
3. Coverdell Education Savings Accounts (ESA)
Much like a 529 college savings plan, a Coverdell ESA is a tax-advantaged investment account that allows you to help your kid save money for educational expenses. Earnings in the account grow tax-free as long as they are used for qualified education expenses such as tuition, fees, books, supplies, and room and board.
There are many differences between a 529 and Coverdell ESA. Unlike a 529, Coverdell ESAs have annual contribution limits and income limits for contributors.
You can open any of these accounts as soon as your kid has a Social Security number. Many experts recommend that parents establish at least one of these accounts for each of your children. Some parents even open all three to give their kids maximum flexibility in how the funds can be used.
Find out which plan is right for your kid.
Our experienced bankers can help you review the options to help you save for your kid's education. Schedule your Key Financial Wellness Review today.