It's never too early to start saving for your kids' college education. Here are four ways you can begin building a college savings plan.
A 529 is a state-sponsored education savings plan and one of the most widely used college savings vehicle because of the incentives and flexibility. Distributions are tax-free when money is used for qualifying education expenses including K through 12th grade. There are no age or income limits for a 529 plan. And the beneficiary can be changed if the student doesn't use all of the funds within the 529.
UTMA stands for the Uniform Transfers to Minors Act, which is the legal provision in many states that authorizes a custodian to hold assets on behalf of a minor child until the child reaches a certain age. An UTMA is not specifically a college saving plan, but the funds can be used for education purposes. Unlike a 529, the beneficiary cannot be changed.
A less-common way to save for kids' college is using a Roth IRA. If your child is under 18 years old but has an income, he/she could begin to fund a Roth IRA. Even though a Roth IRA is a retirement savings vehicle, the funds could be used for college tuition much like an UTMA. Obviously, one disadvantage for using a Roth IRA to fund college is it depletes retirement savings for your student/child.
ESA stands for Education Savings Account and functions much like a Roth IRA where you have tax-differed distributions. There are contribution limits for an ESA of $2000 per year per child, you can only contribute until the child is 18 years old, and all funds withing an ESA must be distributed within 30 days of the child's 30th birthday.
If you need to begin planning for your kids' college tuition, we'd be glad to help.
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