22 Jun How to save for kids college
The day has finally come, Claire is officially walking all over the house. It’s very strange to see such a small person walking. She has been saying Mama and Dadda for a while now, and she is now fluent in gibberish. With her first birthday coming up in August we decided to get her college fund started. I wanted to share an idea with everyone, not sure how it will work but I will let you know. We are going to start an ESA (Educational Savings Account) and ask family and friends to contribute to it instead of giving gifts. We really don’t need any more toys or clothes.
There are 2 different types of college savings options; ESA, and 529. I prefer the 529 for children but we can go over both options so you can make an informed decision.
- Limited to those with income under $110,000 for single filers, or $220,000 joint.
- Beneficiaries must be under 18.
- Max contribution $2000 a year
- Funds in a Coverdell ESA may be withdrawn to pay for education expenses at an eligible elementary, secondary or post-secondary school. ESA funds may be used to pay for tuition, books, fees, room and board, tutoring, uniforms, transportation, computer equipment and special-needs services.
- Investment options for ESA’s include a wide range of stocks, bonds and CDs as well as mutual funds.
- No restrictions on income. Beneficiary can be anyone.
- Max contribution limits vary by state, but can be between $100,000-$300,000.
- Funds from 529 plans may only be used to pay for tuition, fees, books, and room and board at any post-secondary institution that is eligible to participate in federal student aid programs.
- With a 529 plan, your investment choices are typically limited to a small number of mutual funds
The IRS imposes a 10% tax penalty on distributions from either type of account that fails to meet the guidelines for a qualified withdrawal. In addition, the IRS requires you to withdraw all funds held in an ESA prior to the beneficiary reaching age 30 in order to avoid incurring an additional tax penalty.
Basically, unless you’re high income I would recommend starting out with an ESA, if you want to contribute more tan $2000 per child then anything over $2000 can go into a 529.
Message to Claire: I am trying to compile rules for you and advice that I am going to constantly remind you of. I want you to grow up remembering things I have said and hopefully put them to use. For example, here is something I want you to remember; whenever you have a big decision to make, allow yourself at least a week to think it over. During that time talk to friends and family whose judgment you trust. Even if you end up regretting the decision later, you will know you did the best you could with all the information you had.