Saving for college with an education savings account.

Saving for College: How to Get Started

A college education, for most, isn’t cheap. It’s a significant financial investment that totals in the tens, if not hundreds of thousands of dollars.

What’s more, the cost of a college education has grown faster than the overall rate of inflation in recent decades. As a result, graduates have been coming out of school with higher and higher debt loads.

“Saving for college can be a daunting experience,” said Joe Correnti, senior vice president of brokerage product for Scottrade. “Fortunately, there are different plans available that can help you and your child reach financial goals. The key to taking advantage of these options is to start saving early.”

It’s important to know where you’re going before starting the savings process. For example, do you envision an Ivy League education, or do you see your children attending a less expensive in-state school?  Your financial plan for each of these scenarios would likely be very different.

If you’re looking to get started on saving for college, here are some Education Savings Accounts to consider.

  • Coverdell Education Savings Accounts: Up to $2,000 a year can be contributed to each beneficiary of a Coverdell account, however there are income limits to contributing and contributions cannot be made to the account after a beneficiary turns 18. While the contributions are not tax-deductible, the distributions are tax-free if they’re used for qualified education expenses. The benefit of these accounts is that the money can be used not just for higher education, but can also be used for both elementary and secondary education purposes. Moreover, these accounts can be transferred to another beneficiary if the funds aren’t used for the original designee. For more information on income limits and what qualifies as an education expense, please refer to the IRS website.
  • UTMA/UGMA Custodial Accounts: These acronyms stand for United Transfer to Minors Act and United Gift to Minors Act. Contributions to these accounts are considered an irrevocable gift to a minor. The custodian, typically a parent or guardian, has full control over the account until the child is no longer a minor or the account is terminated. The money in these accounts can be used for any purpose (even those outside of education) as long as the custodian can show that the benefit is for the child. Also, the money in the account is generally taxed at the child’s (usually lower) tax rate rather than the parent’s rate, since the child technically owns the money.
  • 529 Plans: 529s are another popular account type established to help save for higher education expenses. Contributions to the plan are not tax-deductible, but future earnings will not be  subject to federal income taxes. In addition, many states don’t tax 529 earnings, and some states even offer incentives on contributions made to these plans.

While there are contribution limits (see IRS website), the IRS does allow 5 years of contributions to be made at one time for those who are starting late. Unlike a Coverdell account, contributions can be made after a beneficiary turns 18.

If you need help figuring out how much you might need to save for college, you can use our College Savings Calculator.  Also, you can review education savings accounts offered by Scottrade. 

The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.

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