Chuck Bentley: Should You Have an Education Savings Account?

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Dear Chuck,

I have 2 daughters that are only 2 years apart that are still in elementary school, but I’m concerned about the cost of college. When is the best time to start saving, and can you explain education savings accounts? I am thinking this is the way I want to help them get their degree without debt.

Thanks,

Mom of Future College Grads

Dear Mom of Future College Grads,

You are wise to be thinking ahead!

Solomon, the wisest man who ever lived, tells us that “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” (Proverbs 13:11 ESV)

Saving a little every month will accumulate over the years and help your children avoid the burden of student loans.

There are numerous ways to save for college.The two most popular are the 529 college savings plan and the Coverdell Education Savings Account. Both are similar to a Health Savings Account (HSA) or retirement account. They are similar in that the money goes to investments like mutual funds, and withdrawals must be for qualified expenses like tuition, room, board, books, calculators, computers, printers and other approved items. It is also helpful to know some specifics about each one to help you make your best choice.

529 Plans

These offer benefits for parents and students, functioning like a Roth IRA. Accounts grow tax-free and distributions for qualified expenses are not taxed. They are owned by the contributor, assessed at the 5.64% parental asset rate for the expected family contribution (EFC), and distributions are not counted as base year income on the FAFSA. This means they do not hurt you when applying for financial aid.

These tax-deferred investments offer the most flexibility and tax-advantages. Withdrawals must meet qualifications or a 10% penalty is charged. In addition, state and federal taxes on the earnings for your tax bracket will be applied.

Contributors can invest aggressively and catch up for any years missed because there are no contribution limits or income restrictions. They will move state to state, and from one child to another. In addition, the beneficiary can be a child or grandchild and can be established by friends or family.

Control of the account stays with the contributor. There’s no limit to the quantity of plans you can establish, but avoid exceeding the cost of education or the limit set by the state. All contributors need to keep each other informed of their plans. These can fund a broad range of post-graduate programs including qualified certificate programs and continuing education.

In a prepaid tuition plan, contributions are pooled with other investors to prepay the cost of a designated college at today’s prices for future use. There’s a limit on yearly contributions and they function like IRAs.

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Source: Christian Post