Tax Savvy Ways to Save for an Education

Here's some more useful tax advice from the National Tax Advice Day website regarding some tax savvy ways to save for an education:

Two of the most tax-savvy ways to save for your kid's future can be found in Coverdell Education Savings Accounts, or ESAs, and Qualified Tuition Plans, known as QTPs.

The main attraction for these programs is the same that draws you to your qualifying retirement account: distributions from ESAs and QTPs are tax-free when withdrawn and used for your child's education.

There are several rules related to ESAs and QTPs that translate into both increased savings and more options:

• The contribution limit for Coverdell ESAs is $2,000 a year. You can contribute even more – often much more – to QTPs.
• You can contribute to both an ESA and a QTP within the same year's time.
• QTPs offer many investment choices, and if you aren't crazy about the fund you're in, you can roll the funds into a different fund once in any 12-month period.
• Private and religious institutions can establish QTPs, expanding your choices of prepaid tuition plans.

There isn't one way of saving that is, hands down, better than the other. As a rule, education savings should be invested - you'll earn a better return when compared to the fairly low interest rates offered by bank savings accounts. But the "right" investment mix depends on the length of time until the beneficiary goes to college.

The pre-tax earnings and non-taxable distributions offered by QTPs and ESAs can make a difference. And, many states offer a deduction or credit for residents who contribute to that state's QTP.

If you're planning to apply for need-based loans, grants, or scholarships, "how" you save can be just as important as how much you save. Distributions from prepaid tuition plans, offered in QTPs, count as the student's income, which can reduce or eliminate financial aid. The same goes for ESAs. They count as the student's assets on financial aid applications.

The right choice for you might actually be a combination of two (or more) of the available savings methods. You should investigate the options (and the financial aid consequences), and choose the method(s) that will help you reach your savings goal for your child's education.

This piece was interesting to me because one of my New Year's resolutions is to sort out our college savings plans.

For more information on saving for college, see these posts:

• Four Basic Ways to Save for College
• College Saving 101: Sorting through the Choices
• Five Tips to Saving for College

For more information on taxes, see these posts:

• Eight Ways to Avoid an Audit
• Tax Law Changes You'll Need to Consider for 2005 Income Tax Returns
• 3 Keys to Choosing the Best Tax Pro
• Five Common Tax Filing Mistakes

For tax planning and filing, FMF Recommends: H&R Block.  Do it yourself or have us do it.  It's never been easier.

Comments

[Barbara Ross]

YES! it's soooooo wise to learn from others and their mistakes as well as their successes.