Paying for college is a big expense that many families should be prepared to face at one point. A way to approach this is with college savings accounts. So, read on and discover the best college savings accounts.
1. Coverdell Education Savings Account (ESA)
Once you’ve deposited your money in such an account, it’ll grow tax-free. You won’t be taxed on distributions either, as long as they’re used to cover qualified college expenses. There’s also the possibility to take out up to $10,000 tax-free to pay for kindergarten through 12th-grade tuition.
There are many limits that apply to these accounts, related to the maximum deposit per year, the possible length of your contributions, and the allowed period of time to leave your money in your account. For instance, it’s not possible to continue the contributions after the child turns 18 and the distributions need to be made before 30 days after the child’s 30th birthday. These two requirements don’t apply to special needs children.
When it comes to the maximum contributions, they can’t surpass the $2,000 each year for each child. What’s more, this limit is gradually reduced for single filers with a modified AGI (Annual Gross Income) between $95,000 and $110,000. For joint filers, these numbers are $190,000-$220,000. Whether you qualify for a Coverdell ESA or not, this also depends on the single filer’s or joint filer’s modified AGI. This can’t be higher than $110,000 or $220,000, respectively.
2. 529 Account
You can find many similarities between this account and the latter. Here, the funds saved by a child’s parents or grandparents will also grow tax-free. Withdrawals used to cover qualified college expenses like tuition, fees, books, and more won’t be taxed either. If the money taken out was refunded due to the Coronavirus, because the school closed, there won’t be any taxes as long as you redeposit this amount in the student’s 529 account within the next 60 days.
If you’re worried about your student loan debt, you can use up to $10,000 from this account to pay it down. Even if the child doesn’t end up going to college, you’re able to roll over the funds for another family member. This process is tax-free! Check which your state’s offers are. Many will give tax breaks that include state tax deductions for contributions to a certain plan. You may also be able to prepay college costs and lock in a set price for your future expenses, even though these kinds of plans usually only cover tuition and fees.
You should definitely read this article and learn all you need to know about student loans!