As of 2014, the average graduate leaves college with an astounding $33,000 in student loan debt. If future college students reside in your home, you might be concerned about imminent higher education expenses. If you can relate, the following 2 financial planning solutions may keep your kids debt free during their college years.
Coverdell Education Savings Account
Depending on your annual income, you might be able to save money for your kids' future college expenses in a Coverdell Education Savings Account. This type of account is commonly referred to as an ESA. To be eligible for an ESA, a person must report less than $110,000 of income on his or her federal income tax return. If you are married and file your income taxes with your spouse, the income threshold is $220,000.
Do you have other relatives who wish to contribute to your children's college funds? If this is the case, multiple ESAs can be opened for each child. But, all of the contributors can't invest more than $2,000 combined in each kid's account during a calendar year.
You may not deduct the money invested in an ESA on your federal income tax return. However, when you take money out of the account, it won't be taxed if you use it for certain educational expenses. The stipulations of a Coverdell Education Savings Account require:
- The beneficiary to be less than 18 years old when the account is opened, unless he or she has special needs
- Contributions made to the account to be in cash
- The account to be opened at a bank or another financial institution authorized by the Internal Revenue Service
- Monies in the account to be dispersed no later than 30 days after the beneficiary dies or turns 30 years old
In order to be distributed tax free, the funds in an ESA must be used to pay for qualified educational expenses. These types of costs include:
- Costs for special needs services
For families who don't meet the income requirements of an ESA, 529 plans are attractive alternatives. These plans don't have income restrictions and are available in every state in the country. When choosing a 529 plan, you have two distinct options. You can either select a college savings plan or a pre-paid tuition plan.
The college savings plan allows you to set up accounts that will pay for your children's future qualified college expenses. During account setup, you may select to invest your money in:
- Mutual funds
- Bond mutual funds
- Money market accounts
You can choose to invest your funds in higher risk securities while your kids are young. Then, as your children near college age, you may wish to direct your financial advisor to shift your investment focus to more conservative alternatives. This strategy should be considered because state governments won't guarantee investments in mutual funds.
These investments also aren't insured by the United States government. College savings plans provide you with the opportunity:
- To open accounts for adult or young children
- To invest more than $200,000
- To open an account during any time of the year
Unlike college savings plans, pre-paid tuition plans require an investor to purchase future college credits at an acceptable college or university. The credits include the cost of tuition expenses. Some pre-paid tuition plans also provide for the payment of housing.
You can open this type of plan through the government of the state you reside in. In some cases, a state government will guarantee the investments you make to a pre-paid tuition plan. Pre-paid tuition plans may require:
- The beneficiary to meet an age or grade restriction
- The beneficiary to live in a particular state
- A person to open an account during predetermined periods of the calendar year
- A person to make predetermined investment amounts based on the number of college credits bought and a beneficiary's age
If withdrawals from 529 plans are used to cover certain educational expenses, they are not taxed by the federal government.
Savings for your kids' future college expenses might seem like an insurmountable task. Thankfully, by utilizing one of the aforementioned 2 financial planning options, many parents can pay for their children's college costs, negating the need for oppressive student loans. To learn more about these options and other opportunities, make an appointment with a trusted financial advisor today.