Saving for college can be overwhelming, but don’t let confusion over account types be the reason you delay.
When you’re researching how to pay for college, the first step is to realize it’s never too early to start an education fund. As the costs of a higher education continue to climb, starting a college savings account may be a good idea to help you achieve your goals.
For the 2018–19 school year, the average tuition and fees for public, in-state college were $9,719, according to U.S. News and World Report. The average cost of tuition and fees for a public, out-of-state college were $21,629, and the average tuition and fees for a private college were $35,676. Thosecosts don’t include room and board and other expenses, which can add thousands more to the total price of a college education.
You have choices for setting aside, investing, and and managing education funds, and it’s important to know the rules and tax implications when researching how to afford college. Let’s look at three ways to invest toward college expenses.
One way to invest toward college is through a 529 plan, an education savings plan operated by a state or educational institution. 529 funds can be used at a qualified college in any state, according to Saving for College, an information site for college saving and planning. Although 529 plans vary from state to state, they generally offer federal tax-deferred growth and withdrawals that are free from federal income taxes. There are no income or age limits, and many plans have high lifetime contribution limits.
Also, some states may offer in-state tax benefits to residents using the state 529 plan.
Here are a few things you need to know:
A 529 plan can be used for tuition costs for K-12, but the withdrawal amount and use of funds have limits. The federal law was expanded, but some states only offer tax-free withdrawals for college expenses. Withdrawals for K-12 tuition may be considered non-qualified withdrawals under some state laws, according to Dara Luber, senior manager of retirement at TD Ameritrade. Before dipping into 529 savings consider implications and alternatives that may be more advantageous, she said.
And before you buy a laptop for your fifth grader, remember that the only qualified expense for K-12 students is tuition, and it’s limited to $10,000 a year per beneficiary.
Perhaps a lesser-known savings vehicle is the Coverdell Education Savings Account. Like 529s, Coverdell plans allow earnings to grow tax free and will not be taxed at withdrawal when used to pay for qualified, education-related expenses. But unlike 529s, the Coverdell account can also be used for education expenses for children in kindergarten through high school—tuition, books, and even school uniforms.
There is a bit of a catch. The maximum annual contribution to a Coverdell account is $2,000—possibly a small percentage of annual education costs, even at the K-12 grade levels. Plus, the allowable contribution amount phases out with adjusted gross incomes of $110,000 or more for single filers and $220,000 for joint filers, according to the IRS. But Coverdell accounts can offer a variety of investment choices, and some may have lower fees than 529 plans, according to Saving for College.
How popular these plans will be remains to be seen now that 529 plans can be used for K-12 tuition. But parents will need to do some basic math when deciding how to use their 529 plans. The idea behind saving early for college is that parents have a longer time horizon to invest and potentially compound returns. Using a 529 to pay for K-12 tuition essentially draws down the balance sooner.
You can also set up custodial accounts for students under two legislative acts: the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). These allow you to transfer ownership of assets to children and have the assets held by a custodian until they become adults. Such accounts are not tax deferred, but earnings are taxed at the child’s rate, which may be lower or even exempt from federal tax, depending on the child’s total assets.
One thing to note about custodial accounts is that, because the assets belong to the student, they’ll be counted among the student’s asset base in financial aid determinations.
Planning, investing, and saving for college can be overwhelming, but knowing your choices and getting an early start can help you boost potential savings and make progress toward your goal.
An education savings plan can help you invest now toward your child’s college expenses down the road, or help fund their K-12 education as well.
Interested in learning more about college savings plans? Visit this page to discover effective planning and investing strategies for higher education.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
An investor should consider a 529 Plan’s investment objectives, risks, charges and expenses before investing. The Program Disclosure Statement contains more information and should be read carefully before investing.
Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.
This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. This material is not an offer to sell or a solicitation of an offer to buy any securities. Any offer to sell units within the Plan may only be made by the Program Disclosure Statement and Participation Agreement relating to the Plan.
TD Ameritrade does not provide tax advice. Every individual’s tax situation is different, and it is important to consult a qualified tax advisor regarding the application of the Plan’s benefits to your own individual situation.
All investments involve risk, including potential loss of principal.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.