The ABCs of Education Savings Accounts


As a parent, your child’s education takes a great deal of attention, direction, and nurturing. What begins with story-time evolves into hours at the kitchen table, parent-teacher conferences, and tutoring. But as his/her skills and mind grows, so should your investment in his/her educational future.  

Whether you are starting to think about it the moment you find out that your family is expecting, or as you take your child hand-in-hand to his/her first day of kindergarten, your child’s educational future should be part of your financial strategy. With the cost of college tuition, including room and board, in the United States averaging at just over $45,000 a year for a private four-year university and just over $20,000 a year for a public four-year university, it’s unrealistic to think your future bright-eyed student will be able to pay for class without a full-time professional job (check out the stats). In fact, the average cost per semester in the state of Florida comes out to just under $10,000. If you are working with a CERTIFIED FINANCIAL PLANNER™ professional, he or she should be prepared to advise you of the available education savings accounts that can help supplement or even fund your child’s college years. Here’s a snapshot of various types of education savings accounts that may benefit you and your family.

529 College Savings Plan

Assembled by the IRS in 1996 as a state sponsored education savings plan, the 529 plan can be an efficient way to save for a child’s education. The account owner remains in control of the funds instead of the beneficiary, enabling the account owner to make changes to the beneficiary in the event that one child decides not to attend college. Available at any age with the ability to be used at a multitude of accredited post-secondary schools, the 529 plan may have tax incentives for your family that include tax-free accumulation and penalty-free withdrawals for eligible educational needs.

Coverdell Education Savings Accounts

A bit more flexible in scope than a 529 plan, a Coverdell Education Savings Account enables the custodian to make a wide variety of investments with tax-free earnings. However, this savings account is limited by contribution amounts, income limits, and age of the beneficiary.

Custodial Savings Accounts

A custodial savings account provides the means for a variety of ends, one of which could be as an education savings account. While the beneficiary may choose not to use the funds for college, the custodian can contribute to the account without limits (subject to gift tax rules) and still control decisions regarding its investments. Unlike the 529 plan, the beneficiary cannot change and the custodian may not change without jumping through a few hoops. Its Achilles’ heel: it is considered a student-asset; the existence of a custodial savings account may impact the benefitting student’s ability to acquire federal and state financial aid. Earnings may also be taxed depending on the level of income.

Education Savings Bonds

U.S savings bonds are backed by the United States government, making them a safe way to save for college. Series EE and Series I savings bonds offer a low-risk investment for college savings. As long as the bonds meet certain eligibility requirements and are used to pay for qualified college expenses, the interest earned is generally free of federal, state, and local taxes. They also offer additional flexibility should you end up wanting to use the funds for other ends outside of education- just be prepared to be taxed at your regular rate.

When planning to finance your child’s education, determining the investments and types of accounts that will yield the highest earnings with the lowest tax implications can be daunting. Some college-saving vehicles may also impact your child’s financial aid eligibility. And while your child’s education is your utmost priority, chances are you have other goals weighing in as well: retirement, travel, your parents’ health needs, etc. Trying to juggle these priorities can be overwhelming. It would help to work through projections with your financial advisor to ensure that college savings goals do not jeopardize other objectives that are equally as important to your financial future. Your trusted CFP® professional can also help you review these accounts and determine the most appropriate savings accounts and investment strategies for your family’s needs.

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