In the United States, over 66% of high school graduates go to college. For the parent of a college bound student, the thought of paying for the rising cost of college can be quite scary. The average cost of tuition for in-state public college tuition is $23,410 which is more than the annual income of many Americans. If the thought of saving for college is making your head spin, grab some aspirin from Walgreens, and review this guide to the best college savings plans.
One of the most popular options for college savings is a 529 plan. These savings plans are accounts set aside by parents for future college tuition. The advantage of a 529 is that distributions for college are federal income tax free. On the other hand, if your child decides not to go to college, you’ll pay hefty penalties for using the money for non-educational expenses.
An alternative to the 529 plan is a Coverdell Education Savings or ESA. With an ESA, there are very few restrictions on what investments you make. An ESA can be used on elementary and secondary school costs in addition to college costs. Like a 529, the ESA features tax-free earnings as long as they are used to pay for educational expenses. The downside of an ESA is that only $2,000 can be contributed each year, and withdrawals not used for education are taxed and penalized.
Another option for college savings is a custodial account. A custodial account is a savings account in your child’s name that you control until your child is legally recognized as an adult. You can deposit as much money as you want and withdraw money at any time without a penalty. The disadvantage of a custodial account is that your money is taxed annually, as well as when you make a withdrawal.
Whatever plan you you decide to choose, start saving early. The morning money saved, the more options your child will have when the time for college arrives.