|Oh yeah, there's also this reason to go to college (Arizona).|
Of course, there is the money in an envelope tucked away under a floor board option, but if God forbid your house burn down, you would be S.O.L. Also, savings accounts are a conservative approach, with little or no reward for allowing someone else (the bank) to use your money for profit. Among all of the investment types out there, the two major educational savings plans, are the ESA and 529. Ever heard of of these? First, educate yourself on these two savings plans on Wikipedia. Here are the links: 529 Plan & ESA.
Now that you're in the know, what are the major differences? According to Erik Folgate of MoneyCrashers.com, they are as follows:
- The invested funds grow tax-free. You are not required to pay taxes on the interest earned.
- It has a broad definition for “qualified expenses”. Along with tuition, room, and board, it covers items like books, computers, and internet access.
- the funds can be used starting when the child is in Kindergarten. This is great for someone looking to use the funds to cover private elementary and secondary schooling.
- Contributions are used with after-tax dollars, but the distributions are tax-free as long as it is used for qualified educational expenses.
- You must make less than $220,000 a year per married coupleo to be able to contribute to an ESA
- An ESA only allows you to contribute up to $2,000 per year
- Contributions are not tax-deductible
- Beneficiary must be under the age of 30
- In some states, the assets of the ESA become the property of the beneficiary
- The limit for contributions is much higher and allows you to save more aggressively
- No age limit for the beneficiary
- Control of the account always stays with the contributor
- Some states allow 529 plan contributions to be deducted on state taxes
- Anyone with any salary can open and contribute to a 529 plan Cons:
- Qualified expenses are limited to tuition, room, board, and books
- The distributions can only be used for post-secondary schooling
- You are locked into the investments chosen by the plan administrator
Now, which one is better for you? That depends on your financial, lifestyle and education plans for yourself and your child. Erik explains further:
Who should open an ESA?
If you are thinking about sending your child to private school and you want more flexibility with how the funds are invested, I think the ESA is your best option. As long as you meet the income requirements, this would be the way to go. Plus, you can use the money to expensive items such as books, computers, graphing calculators, and other expensive items that college requires.
Who should open a 529 plan?
If you are starting out saving for your child’s college expenses later on in their life, then you should definitely open a 529 plan. You’ll be able to aggressively invest and catch up for the years you missed. Plus, if you live in a state where the contributions are tax deductible for your state taxes, you should look into a 529 plan over an ESA.
|But Xavier does have an awesome logo|
How have you decided to save for your child's education? Maybe you're not going to pay for it. Why or why not? Tell me! Tell us!!