August 2019

Saving For College

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Paying for college or university has become increasingly expensive. Outstanding student loan debt in the fourth quarter of 2018 rose to $1.46 trillion, an increase of $15 billion, according to the New York Federal Reserve. Higher education may be expensive, but even if high school graduation is only two years away, you have five years to save for senior year of college. A 529 plan and Coverdell Education Savings Account (ESA) are two tax-advantaged ways to save.


529 PLAN
States administer 529 plans, and their contribution limits are as high as six figures. Additionally, there are no income restrictions on who can contribute, so anyone can put money into these plans. This combination, plus tax-deferred potential growth, tax-free distributions for qualified expenses and donor ownership of the account, makes a 529 plan ideal for building college savings quickly.


If grandparents or other relatives want to gift money for their grandchildren’s college, they can each give up to $15,000 per year (in 2019) free of federal gift tax. Not only that, but any individual can bunch five years’ worth of contributions into one year. That’s $75,000 in Year 1. In this case, you can’t contribute anything else in the subsequent four years.


COVERDELL ESA
Unlike a 529 plan, an ESA has income limits, but they are fairly generous. The income limit is $110,000, or $220,000 for taxpayers filing jointly. Contribution limits, however, are small at $2,000 annually. Still, every little bit adds up over time, and potential growth is tax-deferred and withdrawals for qualified expenses tax-free.


Both a 529 plan and ESA affect potential financial aid differently, so talk to your tax and financial professionals to chart your best course.


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