Children's Education Savings Accounts Compared: here's what actually helps. Are you planning ahead for your child’s future education? Here’s how to compare children’s education savings accounts.
What Are Children's Education Savings Accounts?
Children’s education savings accounts, often referred to as 529 plans, are a type of college savings plan designed to help families save money for education expenses. These plans are tax-advantaged and can be used to pay for tuition and certain expenses at any public, private, or religious elementary or secondary school - not just colleges or universities.
What Can They Be Used For?
Money saved in a 529 plan can be used to pay for tuition and certain expenses at any public - private, or religious elementary or secondary school - not just colleges or universities. These expenses include books, computers, room and board, and supplies. Qualified education loan repayments can also be paid from a 529 plan up to a total of $10 -000 per beneficiary.
How Much Can You Contribute?
The annual contribution limit for a 529 plan is $19,000 ($38,000 for a married couple) per beneficiary. Contributions greater than this amount could require the contributor to file a gift tax return. However, contributions to a 529 plan aren't deductible for federal income tax purposes.
State Tax Benefits
Nearly 40 states and the District of Columbia offer state income tax deductions or credits for contributions to a 529 plan. However, eligibility for state tax benefits varies by state.
Who Is Eligible?
Anyone can open a 529 plan - regardless of income level. However, individuals with a modified adjusted gross income (MAGI) of $168,000 or greater ($252,000 for couples) are ineligible for a Roth IRA. This means that they may have fewer options for tax-advantaged savings for education expenses.
How Does It Compare To Other Investment Options?
A 529 plan is a type of college savings plan that offers tax advantages and flexibility in how the funds can be used. Other investment options, such as a Roth IRA - may also be used for education savings, but the rules and tax treatment differ. Additionally, the annual contribution limit for a Roth IRA is lower than that of a 529 plan.
Here is a comparison table to help you understand the differences:
Other Things To Consider
When considering a 529 plan, it's important to keep in mind that under current tax law, an account holder is only permitted to change their investment option in a 529 plan twice per year or when there's a change in the beneficiary. Additionally, if the funds aren't used for qualified education expenses, there may be taxes and penalties on the earnings.
If you're unsure whether a 529 plan is right for you - consider speaking with a financial advisor or tax professional to discuss your options and determine the best course of action for your unique situation.
