Accounts to pay for college or even private high schools can be a smart way for parents to prepare for their children's futures. Not every account is the same, and certain savings accounts could affect financial aid eligibility and taxes. It is in parents' and students' best interests to educate themselves on the various education savings plans available to them - and which ones make the most sense for their families.
Families should do their research and work with professionals who understand the subtleties of school savings plans. For example, according to Cappex.com, a college information site, students' income and savings have a larger, more negative impact on the availability of financial aid than the portion of their parents' assets factored into the equation. Students with sizeable savings accounts in their name may end up adversely affecting their financial aid eligibility. A financial advisor and loan expert can advise families on these confusing financial facts.
· 529 College Savings Plan: 529 accounts are a popular education savings plan. They operate in a similar fashion to IRA and 401(k) plans in that savings for education are earned tax-free through investment opportunities. SallieMae says 529 plans are offered by states or educational institutions under Section 529 of the Internal Revenue Code. These tax-advantaged plans generally have no income limitations and high contribution limits. The usage of funds in 529 accounts are subject to regulations.
· Coverdell Education Savings Account: Coverdell accounts are versatile in that they enable the money to be spent for elementary through college education, which is a larger range than other plans. This is another tax-free plan when used for school purposes. Coverdell contributions are capped at $2,000 per year, and they're only available to families below a specified income level, says the resource SavingforCollege.com.
· Uniform Gifts to Minors Act Account: These accounts are not traditionally designed for education but can be established to offer gift assets to minors. The custodian of the account can sell the assets for the child's benefit at any time, and once the child reaches 18 or 21, recipients can use the funds in whatever manner they choose. However, UGMA may affect financial aid eligibility.
· Roth IRA: Parents can open up a Roth IRA in their child's name once the child begins earning income. Even though there are penalties to taking earnings out before the age of 59.5, exceptions include purchasing a first home or qualified education expenses. A Roth IRA isn't subjected to legal and administrative fees that can come with trusts, which are another savings avenue.
· Canadian Education Savings Grant: With a CESG, parents can save for their child's education by opening up a Registered Education Savings Plan. The government then matches the money up to a certain percentage and deposits it into the child's RESP. The extra funds the government deposits are called the CESG.
Parents can help finance their children's educations through various savings plans. A financial advisor may shed more light on which products are best for families.
