Starting an Education Savings Plan

There are a number of different education savings plans and it can be a bit tricky to determine which one best suits your needs. Most people typically favor a plan that's somewhat flexible and also yields high returns. Listed below are three basic options that you can use individually or in combination:

  • Open a savings account for your child. Contribute to it as often as you can, even if that means only a few dollars. As your child gets older, encourage him or her to contribute to the savings account, as well. Let them have some control over how they spend their savings, but make it clear that you expect a certain amount or percentage to go for college- or related expenses. These funds might be used to cover the cost of a car for school and dorm room accessories. In other words, use this account for college-related expenses that aren't allowable through other education savings accounts. You can also add CDs, stocks and bonds to your child's education savings portfolio.
  • Consider investing in a Coverdell Education Savings Account for your child. The Coverdell ESA is a savings plan that can be used for elementary-, secondary- or college tuition. Even if you find that you prefer the 529 plan below, there are certain tax benefits specific to the Coverdell ESA, so it may be prudent to consider using both plans for your children. Be aware, however, that under current legislation, Kindergarten through 12th-grade expenses will not qualify for Coverdell usage after the year 2010. And you, as a parent, will also lose some control of the account. It will eventually be disbursed to your child, even if he or she doesn't go to college. Furthermore, it must be fully withdrawn by the time the beneficiary is thirty years of age or significant penalties will be applied.
  • 529 education savings plans are the new kid on the block, but they seem to have many benefits. 529s are operated by individual states or educational institutions. What's more, you can shop around - each 529 is different and you're not restricted to any particular state's or institution's plan. And, provided the plan meets a few simple conditions, all of your 529 contributions are federal-tax-deferred and withdrawals for education purposes are tax-free at the federal level. (Some states, however, may apply their own state taxes.) 529 plans aren't subject to age restrictions, so you can use them to save for both your children's and your own future education needs. The minimum contribution to begin a 529 can be as little as twenty-five dollars, and the maximum contribution amount is substantial - over $300,000 in some states. Withdrawals can be made for reasons other than education if you're willing to incur a ten-percent penalty on earnings. But use caution here: if you withdraw for non-qualified uses, you'll be taxed on the contribution portion of the withdrawal at your current tax rate.

Saving for your children's education may seem difficult to when starting out, but it's nevertheless very important. Studies show that college graduates earn approximately sixty percent more than high school graduates over their working lifetime. Education savings plans offer a great way to save for educational expenses and reap federal tax benefits along the way.

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