Education Planning
Whether you’re a seasoned parent, first-time parent or thinking of starting a family, college is a huge expense and investment for your child(rens) future. Consider this: As of 2020, the average cost of college education in the United States ran about $36,000 a year. According to usnews.com, these costs have tripled over the past 20 years at an annual rate of 6.8%. This means if you have a child born today, in 18 years it’s going to cost over $116,000 for one year of college education bringing the total to at least $500,000 over four years.
How does one go about saving for college? There are several options and you should consider starting as soon as possible. Three of the many options we cover at Allegiant Wealth Strategies include 529 College Savings Plans, Coverdell IRAs, and Roth IRAs.
529 College Savings Plans
529 college savings plans are one of the best choices for those interested in tax-exempt accounts. The money contributed to your plan is not taxed when withdrawn, and will grow tax-free. This means that however much your money grows in a 529, you'll never have to pay taxes on it. However, deductions on your federal income tax return are not allowed. This plan allows not only parents to contribute to or have a 529 plan but grandparents and family members as well. In 2018, 529 plans were opened to for the use of K-12 tuition costs only with an allotment of $10,000 yearly for that purpose. 529 plans can be issued through one’s state of residence or through the expertise and guidance of a financial advisor.
Coverdell Education Savings Plans
When it comes to limits on annual contributions for a Savings plan, the Coverdell Education Savings Account only allows contributions of $2,000 a year into a child’s account. In order to take advantage of this plan, one must be under a certain income limit to contribute. Single filers with modified adjusted gross income between $95,000 and $110,000, and for joint filers with between $190,000 and $220,000. However, the federal advantage is that funds grow free of federal taxes. Withdrawals don't have to be reported for tax reasons if the money gets used for qualified expenses such as student's tuition and all associated fees, books, equipment, and supplies for their attendance at an eligible institution.
Roth IRAs
IRA accounts are often viewed for the sole purpose of retirement and, while this is often the case, they can also be used to save for college. Qualified college payments can be used through an IRA if there have been five years of contributions to the account. Like retirement IRAs, you pay taxes upfront for Roth IRAs and pay taxes on withdrawals for traditional IRAs. To use IRA funds for college education, one must be enrolled in a qualifying institution and use the funds on expenses such as tuition, fees, books, supplies, and equipment required for enrollment.