Couples who aren’t even parents yet might be thinking about starting a college fund for their future children. Many colleges now already cost well over $50,000 a year and with increases each year, who knows what tuition will cost 18 or more years from now. The good news is that there are savings plans that will ease the stress of saving for college. One of the many financial services that KNR Consulting provides is help with advice on planning and saving for college. If you want to start saving for your young one’s future college career, contact a financial advisor for help with all of your financial planning needs.

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Coverdell ESAs

This plan can be used when you want to pay for private school tuition before college, as well as college contributions. A benefit of these plans is that you can change the investment options during the year, which is now allowed with 529 plans (more on those later). There are also limitations with Coverdell plans. With each child, there is a limit of $2,000 that can be added to the plan each year. If you contribute that amount, the grandparents cannot contribute until next year. Another limitation is that families only qualify if their income does not exceed a certain amount: $110,000 for individuals, or $220,000 for joint filers. The funds in these plans also need to be withdrawn by the time your child reaches the age of 30.

529 Plans

financial advisorThese plans tend to be more beneficial because they have more flexibility regarding contribution amounts. These plans also don’t have income restrictions or age limitations on when the money must be used. There are two types of 529 plans:

  • Prepaid tuition plans. These plans allow you to buy credits at their current prices and can be used at a specific school or group of schools.
  • College savings accounts. With this plan, you can choose a portfolio offered within a 529 plan to make contributions to. You can only change the portfolio once a year; however, with this account, you can choose which college or university the money will be used at.

Knowing where your child will go to school can be a shot in the dark. However, some prepaid tuition plan options allow you to convert the investment to be used at some private or state schools.

Penalties

Both Coverdell and 529 saving plans have early withdrawal penalties, so be sure that you are aware of the implications of using the money for any other purpose. If any money is taken out after it has been contributed to either plan, it counts as taxable income and will also receive an extra 10 percent tax penalty. If you take $2,000 from an account that has $15,000 in contributions and $5,000 in earnings, $500 is considered taxable income and that will give you a $50 tax penalty. So if you want to buy a boat with your child’s college fund, it will cost you more than just the price of the boat.

Taxes and the Market

A significant amount of money can be added to either plan, and it is considered a gift, but gift over a certain amount of money and you will be required to fill out a gift tax return. 529 plans are not federally taxed and typically aren’t subject to state taxes either, but they money must be used for educational purposes, including tuition, books, and room and board. The stock market can affect a 529 plan, but don’t stop contributing during a down market time period. Stopping contributions during these times will only slow investment growth.

Dealing with your own finances is a struggle, let alone saving and planning for your children’s college. With experience and quality guidance, get the financial planning help you need from the financial advisors at KNR Consulting. Whether you are looking for advice on how to plan and save for retirement, looking at your social security retirement benefits, or if you are just beginning to save for your child’s college fund, don’t do it alone. Our financial consultants can help you with investment strategies and advice on various financial topics. Give our financial planning firm a call today.