Many young people today must shoulder the burden of high student debt. In order to minimize this burden for the future generation, it’s important to save for college strategically. It is a good idea to consider all the possible education savings options to create a plan based around your needs.
At Firenze Wealth Management, our experienced financial advisors can help you to work an education savings plan into a holistic financial plan. Learn more below, and contact us today to request a consultation.Contact Us
Common Savings Plan Options
There’s more than one way to save for college. The following are some of the most common accounts for education savings. If you have any questions, our advisors will be happy to assist.
These plans help you save for education expenses by offering tax advantages that may make saving for college a little easier.* Though 529 plans are most commonly used for college expenses, they can also be used for K-12 education expenses, as well.
Two potential issues may arise with 529 plans. First, if the money is not used for education expenses, depending on the state, there may be tax penalties. Secondly, some investment restrictions exist on these accounts—such as only being able to make changes to the investment plan twice a year.
Education Savings Account (ESA)
An ESA allows you to contribute up to $2,000 per year, per child. You invest after-tax money in this account, and it grows tax free. ESAs may be a great option for some people, but note that you can only qualify if you’re within the income limit. Another important consideration to keep in mind is that the funds must be used by the time the beneficiary turns 30.
UGMA or UTMA Accounts
A UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors) are accounts in the child’s name but controlled by a custodian, typically the child’s guardian. Once the child reaches a certain age (either 18 or 21) they gain all control of the account.
Part of the gains on this account are tax-free, part are taxed at the custodian’s income tax rate, and part are taxed at the beneficiary’s tax rate. One benefit of this account may also be its biggest drawback for education savings: there is no requirement that the funds be spent on education expenses. Once children gain possession of the money, they may use it however they wish.
Standard Savings Account
If you’re saving for a big expense, it may seem logical to save money in a savings account, but savings accounts have some drawbacks compared to other education savings accounts. A standard savings account has lower risk than investing your funds, but with lower risk comes lower returns. The amount in savings account may also impact the availability of federal financial aid.
What’s Your Plan?
Do you have a savings plan in place to help pay for your child’s education? Discuss your options with a Firenze Financial Advisor today.Contact Us
Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.