Parents have a number of tax-advantaged ways to save for their children's
education.
| Account |
How it Works |
Pros |
Cons
|
| 529 college-savings plans |
Invest after-tax dollars in a state-sponsored fund. Earnings on the
investment are federal-tax free, as are distributions when used for college
expenses. State tax benefits may apply. |
The money is controlled by the owner - usually a parent - rather than
the child, resulting in more favorable financial-aid treatment. |
Investment is subject to stock-market downswings, and fees can be high. |
| 529 prepaid plans |
Families purchase shares of future tuition bills at current rates.
Money in the plans is exempt from federal taxes, and is often exempt
from state taxes as well. |
There's no risk to the principal, since these plans are typically guaranteed
by the state governments that offer them. |
The state guarantees tuition based on the average of in-state public
college tuition rates. If the student attends an in-state public college,
the plan pays the tuition and required fees. If the student decides to
attend a private or out-of-state college, families typically have to
make up the difference. |
| Coverdell Education Savings Accounts |
These accounts are trusts that are federally tax-free when set up to
pay for education expenses. They can be put in the child's name or a
parent's with a designated beneficiary named. |
A good way for families looking to same a little at a time, for a broad
range of school years and educational purposes, including uniforms, supplies
and tutoring. |
Contributions are phased out for donors with incomes starting at $95K
(single filers) and $190K (married, joint filers). Contributions max
out at $2000 per beneficiary each year. |
