Part of your investment for the future is ensuring your children have solid college educations. But you may be wondering how to best save for college. There are many plans out there that can assist you, such as a 529 plan or a Coverdell ESA. Which one is better for your family? Let’s take a look.
Bottom line is, you really can’t go wrong with either one. Top reason? They’re both tax free when utilized to pay for college tuition. That said, they do differ in a few key ways. You have a couple of options:
- Do you use the 529 plan to pay for the entirety of your child’s college savings?
- Do you use a Coverdell ESA for the maximum amount of $2,000 each year, putting any extra savings above $2,000 into a 529 plan?
Therein lies the question. Even despite its low annual contribution cap, Coverdell ESAs are looked at as a wise choice for many American families. That’s because it allows you to self-direct your investments, just as you would with, say, an IRA for your retirement. Another factor that makes them attractive is that you can withdraw the money tax-free for K-12 and college expenses.
Compare that with 529 plans, which cannot be used for any schooling other than college. This is a top sticking point with parents who are struggling to pay for private elementary and high school and need the money for those tuition payments.
That being said, a 529 plan doesn’t have the annual contribution, age or income limits that are inherent in the Coverdell. That’s the top reason families choose 529 over Coverdell ESAs – well, that and the fact that they like the investment options afforded by the 529. Some people simply don’t want to be burdened with self-direction of investments, and that’s OK. Again, it’s all a matter of personal preference. Both plans will help you save for college. Period. It’s how you want to get there that matters.
One more big reason people opt for 529 plans is that they are eligible for state tax deductions; however, there are currently no state tax deductions for investing in a Coverdell ESA.
Of course there are other ways of saving for a college education, with stock investments at the top of the list. Many families invest in stocks in conjunction with one of the above plans for the most impact. While your stock broker can help you choose the right balanced portfolio, be careful to check up on your broker frequently to ensure he’s operating in your best interests. You don’t want to put all your college savings into one basket and become the victim of fraud. Yet another reason to know a qualified stock broker fraud attorney!