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Investing in Education Really Adds Up

Being able to afford to send your children to the college of their choice can be one of the great joys of being a parent. As with most financial decisions, you must consider what you are trying to accomplish. Following are several plans designed to help save for educational expenses. Be mindful of the tax implications and consult your tax preparer in order to choose the one (or combination) that best fits your situation.

529 Plans, Custodial Accounts, and Coverdell Education Savings Account

529 Plans

A 529 Plan is a common way to start saving for future college expenses. Even though these plans are not deductible on your federal tax return, the interest earned is tax-deferred. Additionally, when you use these funds to pay for the beneficiary’s college expenses, that portion is federally tax-free. If you’d like more information, visit the IRS site, the Savings for College site, and your tax advisor can all be resources for you.

Custodial Accounts
Before 529 Plans came into the picture, parents traditionally used custodial accounts to help build assets for college costs. Custodial accounts offer the greatest flexibility in terms of how the money is ultimately used. However, they lack the tax benefits of the other programs.

Coverdell Education Savings Account

The Coverdell Education Savings Account provides parents and others the opportunity to save for a child’s education expenses (college as well as qualified elementary and secondary education expenses) in a tax-advantaged account. Distributions are tax-free as long as they are used for qualified education expenses.

The total contributions for the person named as beneficiary cannot exceed $2,000 per year regardless of the number of accounts set up in his/her name. Keep in mind there are contribution limits based on the contributor’s Modified Adjusted Gross Income.

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