College Savings Options
Typically when selecting an investment vehicle to use for college savings, a major consideration would be the tax provisions for each option. There are 3 categories of college savings options: Taxable Investments, Investments with special provisions for paying for higher education, and options created specifically for education that have the most favorable tax treatment. Within these three categories, Coverdell accounts and 529 Plans are the most advantageous to use for saving for education.
For a comprehensive comparison of savings vehicles, please download the College Savings Options Chart
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts (sometimes called either Coverdell accounts or ESAs) receive a federal tax exemption if the money is used for qualified withdrawals. These accounts can be used to save for elementary school, secondary school and college-related expenses. The main limitation on these accounts is that individuals can only contribute $2,000 into these accounts each year. In addition, there are income limits for the contributor. To contribute the annual maximum allowable amount, the individual must make less than $95,000 if single or $190,000 if married. Partial contributions can be made for incomes between $95,000-$110,000 if single, $190,000-$220,000 if married.
529 Accounts also receive a federal tax exemption if the money is used for qualified withdrawls. In addition, some states offer state tax exemptions and/or other favorable provisions. The main attraction of this account is that it has high contribution limits allowing an account owner to contribute typically between $250,000-$300,000/account. In addition, there are no income limits for the contributor.
There are over one hundred 529 Plans in existence, most are sponsored by states. These plans can be either savings plans or pre-paid tuition plans. In addition, there is one plan sponsored by a consortium of private colleges and universities, the Private College 529 Plan which is a pre-paid tuition plan. Notre Dame, as well as over 270 other schools, participate in this plan. To help you determine what types of plans might meet your family's needs please visit: Selecting a 529 Plan