What Are Some Good Ways to Save for College Expenses?
Learn about tax-advantaged college savings plans.
You want your kids to go to college, but how do you pay for it? Whatever age or grade they're in, the key is to start saving right now. There are plenty of ways to save, but these two savings options provide great tax advantages.
One is the Coverdell Education Savings Account, or ESA. The other is the 529 college savings plan. 529 plans vary from state to state, but the money can be used for college anywhere. You can also shift the savings from one child's account to another's.
529s and ESAs both let cash contributions and earnings grow tax-free. Contributions are not tax deductible, but when your student uses money for a qualified college expense such as tuition, there's no federal tax to pay. ESAs have income and contribution limits. 529s don't have these restrictions.
However, an ESA lets you withdraw money, K through 12, for any qualified education need. 529s can only be used for college expenses. ESAs generally have more flexibility with investment choices, but both savings plans offer options for investing contributions.
The actual return will vary depending on several factors. For this example, we'll use an annual return of 7%. Let's say you contribute $100 a month for 10 years. You've put in $12,000. But with tax deferred growth, the account has grown to more than $17,000 in savings. Sock away that much for 15 years and you've nearly doubled the amount.
Even if you get a late start, look at how much your contributions grow after only a few years. Best of all, when the money is withdrawn, you pay no federal tax as long as it's used for qualified college expenses. Other non-tax deferred accounts face taxes that can take a huge chunk from your savings.
529 prepaid tuition plans are also offered, but they're not available in every state and come with certain restrictions. The huge benefit is locking in today's price for tuition that's sure to cost a lot more in the future. There's much more to learn about these plans to decide which one is right for you. We'll be happy to explain all your college savings options and answer your questions. Contact us to learn more.
The information provided is not intended to be legal, tax, or financial advice. BB&T hopes you find this information useful but we cannot guarantee that it is accurate, up to date, or appropriate for your situation. Financial calculators are provided to assist you in estimating the approximate costs associated with any bank activity. Your actual costs may vary. You should consult with a qualified attorney or financial advisor to understand how the law applies to your particular circumstances or for financial information specific to your personal or business situation.
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