Education Savings Plans

by Valerie Nelson | More from this Blogger

18 Sep 2006 08:59 AM

Did you know that September is officially "College Savings Month? With the costs of college soaring each year (See my previous article titled College Affordability for more on this subject), most parents are going to need more than one month to save! All kidding aside, making September College Savings Month is an attempt to help make parents aware of different saving options and the value of starting to save early for their children's college education. One of the most popular options, the 529 plan, recently got even more enticing.

Last month President Bush signed the Pension Protection Act into law. You might ask what that has to do with you and your child's future education. Let me explain. 529 savings plan's were originally set up to enable you or your student to withdraw money from the special savings account for education related expenses without having to pay Federal taxes on those funds-until the year 2010. After 2010 families would be responsible for paying taxes when the money was withdrawn as if it were income to the family. This could have potentially cost families thousands of dollars each year in taxes. In an unusual move-for the benefit of the consumer, the Feds decided through the Pension Protection Act that they would extend indefinitely the ability to withdraw these funds for education tax free. Most states have a 529 college savings plan, some of them can be used for college expenses out of state, and many states are moving to make the withdraws free of state tax.

Another savings option is the Coverdell Education Savings Account which is very similar to the 529's. Your earnings grow and education related withdraws or distributions are tax-free. An additional benefit of the Coverdell plan is that families can use the plan to help pay for primary or secondary education costs at a private school. The tax- free status of this type of account will expire in 2011. Perhaps the Feds will also change this date like they recently did for the 529's. One more word of caution about the Coverdell. Families can only contribute up to $2,000 per year per child. The 529 allows a contribution of up to $12,000 per child.

According to SavingforCollege.com, other viable investment opportunities for college include:

U.S. Savings Bonds-EE and I bonds purchased after 1989 by someone at least 24 years old may be redeemed tax-free when the bond owner or the bond owner's spouse or dependent pays for college tuition and fees. In 2006, the tax exclusion is phased out for incomes between $63,100 and $78,100 (between $94,700 and $124,700 for married taxpayers filing jointly). These income limits increase each year.

Individual Retirement Accounts-Early withdrawal penalties are waived when Roth IRAs and traditional IRAs are used to pay the qualified post-secondary education costs of yourself, your spouse, your children, or your grandchildren. (Taxes may still be due on the withdrawals, however.)

Talk to a qualified financial advisor about the best options for saving for college for you and your family.

Learn more about Valerie Nelson

Valerie is a Families.com blogger, freelance writer and small business owner. Valerie helps non-profit organizations with fundraising through grant development for their programs and projects.

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