Saving for College
Paying for your child’s college tuition may seem overwhelming – especially with ever-rising education costs. But don’t worry; there are many ways to save for college, as well as opportunities to supplement those savings with financial aid and student loans.
Following is a brief summary of education savings programs to consider. Your Western & Southern Life sales representative can help you review your options and select the right choice for you.
Coverdell Education Savings Account (ESA)
Formerly called Education IRA, Coverdell ESAs allow contributions of $2,000 per year per child. While contributions are not tax deductible, account earnings accumulate tax deferred, and can be withdrawn tax free to pay for qualifying primary, secondary, or college education expenses. You can choose from a wide range of investments, including stocks, mutual funds, and bonds. Your registered Western & Southern representative can help you set up a Coverdell ESA.
Custodial Accounts (UGMA/UTMA)
Custodial accounts (UGMA/UTMA) are taxable savings accounts set up in a child’s name under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). To set up an UGMA-UTMA account, you need to work with a bank, investment firm, brokerage firm or insurance firm, transfer in assets (which can be cash, stocks, mutual funds, bonds), and name a custodian. While there are no limits on the amount that can be put into this type of account, there are some restrictions. Your Western & Southern Life representative can help you set up an account.
Every state offers at least one 529 Plan, which can be a savings plan or a prepaid tuition plan. In a 529 Savings Plan, earnings are tax-deferred, and distributions for college costs are free of federal taxes. You can choose a 529 Savings Plan from any state and use the money for college in another state. On the down-side, a 529 Savings Plan can be inflexible because investment options are limited, which impacts earnings potential. Since rules and investment options vary by state, visit www.FinAid.org to compare plans.
State-Sponsored Prepaid Tuition Plans
State-sponsored prepaid tuition plans (a type of 529 Plan) allow you to prepay your child’s college by locking in tuition prices at current rates. Rules vary by state. Some states have suspended new accounts or contributions. Find more information at www.FinAid.org.
Series EE and Series I Savings Bonds
Series EE and Series I savings bonds are reliable, government-backed savings vehicles that offer another way to save for college. Their rate of return is typically lower than with other investment vehicles. You do not pay taxes on these until you cash them in, and if you use them for education expenses, you will pay no taxes at all. However, if redeemed early, you will sacrifice some of the interest. Find out the latest rules and purchase options at www.TreasuryDirect.gov.