PursePower — Saving for College
You just had a baby? Congratulations! Now– have you thought about how you are going to pay for college? Here are three ways to save:
- Coverdell Education Savings Account (ESA) An ESA allows you to contribute up to $2,000 annually to an investment account. You don’t receive a tax deduction for the contribution, but if the money is used for private K-12 school, vocational school, or college, there are no taxes due on the gains. There are income limits on the contributions, and the money becomes the property of the child at 30 if it hasn’t been spent.
- Uniform Trust for Minors Account (UTMA) A UTMA is a regular investment account owned by an adult on behalf of a child. There are no restrictions on withdrawals and the money can be used for any purpose. Contributions to the account follow the same rules as any other cash gift. The first $1,250 of earnings each year is tax-free, and the next $1,250 is taxed at the child’s rate, so the account does have some tax advantages. It can hurt for financial aid purposes as it does have to be reported on the FAFSA as the child’s asset. And it becomes the child’s property at 21.
- 529 Accounts 529s are the most common and popular way to save for college. There are two types: prepaid tuition and investment accounts. For prepaid tuition, you lock in the current price of in-state tuition and pay it over the years remaining until your child starts school. I’m not a big fan of these plans, especially in Maryland.
The other type of 529 is an investment account. Most states run plans, and you do not have to be a resident of that state to participate. Maryland’s plan is inexpensive, with highly rated investments. You also receive a Maryland state tax deduction of up to $2,500 per parent, per child. If you make under $175,000 as a couple, there is a state matching program.
While every situation is unique, we have found that the Maryland 529 plan is a good starting point for many of the families we work with. You don’t pay any advisor commissions and you receive a state tax deduction. The money does not have to be used for a Maryland school.
You can find great resources and calculators on our website, as well as register for our educational events at www.covingtonalsina.com. If you have questions, email us at info@covingtonalsina.com.
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