There are multiple ways to
save for college, including Coverdell Education IRA’s,
Savings Bonds, and College 529 Savings Plans to mention a few. When I began saving for our son’s college, I was looking for a tax advantaged vehicle, which is a fancy way to say a plan that would allow me to save for college, growing any earnings tax free and possibly deducting any contributions from my taxable income .
After looking into the
Coverdell Education IRA I found that it would allow earnings to grow tax free; however the contributions were not deductible. Additionally the any money saved has to be used by the child it is saved for and if not used then it goes to that child a certain age (I forget when) and is taxed. The other draw back is low contribution amounts.
Savings Bonds are another way to save; however the interest earned is usually lower than what can be earned through other means such as mutual funds. While this is true I have purchased savings bonds for nieces and nephews as gifts especially when they were younger. The last time I looked any interest earned on savings bonds is exempt as long as it is used for college expenses.
Now getting to 529 Savings plans, this was created by Congress in order to provide families a way to save for college. Once money is contributed it can grow tax free and the money removed tax free as long as it is used to pay for covered expenses. Other highlights of the plan include the ability to transfer any savings to different people within a family. Meaning I could save money for college for my wife, if she did not use it then we could transfer the beneficiary to our son, and then our daughter, without any tax penalty. Besides four year colleges and universities the money can be used for other institutions such as smaller community colleges and even prep school.
Every state should offer a 529 plan and most allow for the contributions to be deducted from state tax income taxes; however, to my knowledge no changes have been made to allow federal income tax deductions. (Try writing your congress person in order to change this.) Even though most states offer 529 plans, many financial intuitions also offer ‘national’ plans meaning that the money can be used for any qualified education in the US.
I should end this post by saying that I am not a tax advisor or financial specialist and you should consult your own tax and financial specialists for specific questions and how these vehicles can affect you.