Future College Fund is not a 529 savings plan and does not require one to use this site. There are many types of college savings plans to grow your money for college further! 529’s are just the most common.
There are several different types of education savings accounts that can be used to save for your child’s future education expenses. Here are a few things to consider for each type of account:
Coverdell Education Savings Account
- Tax Advantage: Use after-tax dollars, but money in the account grows tax free, and no taxes on the distribution if used for education expenses
- Contribution Limit per Year: $2,000
- Income Restriction on Contributor, See latest IRS guidelines
- Very flexible investment choices and can reallocate the portfolio as often as desired (similar to a IRA)
- Distribution Restrictions: Any qualified education expense, including preschool through college (this includes elementary through high school)
- With a Coverdell, once the child reaches 18, the account control is given to the student, and they can do whatever they want with it, including withdrawing it and paying penalties
529 College Savings Plan
- Tax Advantage: Use after-tax dollars, but money in the account grows tax free, and no taxes on the distribution if used for qualified secondary education expenses
- Contribution Limit per Year: Varies by state, $100,000 to $350,000
- Income Restriction on Contributor: None
- Stricter investment choices and can only re-balance the portfolio twice per year
- Distribution Restrictions: Funds are limited to secondary institution expenses only
- The parent is the permanent account holder, and remains in control of the money for all time
UGMA Custodial Account
- A UGMA is a custodial account that is used to gift assets to minors
- They can also be UTMA accounts, or Uniform Transfer to Minors Act accounts
- The assets given are owned by the child
- Since the assets are owned by the child, they can impact the child’s ability to receive financial aid in the future
- This type of account is beneficial to the giver for tax and estate reasons (avoiding the estate tax and income on the assets are paid at the child’s tax rate)
- Distribution Restrictions: None, the custodian can sell the assets for the child’s benefit at any time and for any reason, and the child can once he reaches 18 or 21, depending on the state
Which Education Savings Account is Best?
So which type of education savings plan is the best? Its a tough choice. Coverdells are great in that they can be used for all education expenses. However, some parents worry what their child will do with the money when they take control. A 529 plan avoids this, and it allows the wealthy to provide for their child’s secondary education. A UGMA is less favored, but it allows the money to be used for essentially anything, and is not restricted to educational uses. We highly recommend consulting a financial advisor to further assist your decision. There can be consequences not foreseen such as not qualifying for financial aid because of assets in a UGMA. There may be scenarios where a custodial savings account makes the most sense or saving in a parents account. So that the child could apply for scholarships and the like without penalty, and have more flexibility to use the gifted money.
Why save for college now?
The longer you have until you need the money, the more of a chance it has to grow. Even small amounts invested regularly have the potential to accumulate over time. Based on the chart below, consider this: $300 monthly contribution could potentially grow to $153,122 after 20 years, assuming an average annual return of 7%. Even if you are getting a late start, the same $300 monthly contribution could potentially total $21,480 after just five years.
What if you cannot afford $300 a month? Even a $50 a month contribution has the potential to grow to $25,520 over 20 years.
As the chart above illustrates, regular monthly contributions can add up. By investing a regular amount each month. Perhaps the most effective method to build a college fund is to make the process automatic. Most 529 plans allow you to set up monthly automatic contributions as low as $50. (Graph information provided by Fidelity in this article.)