by Alden Smith
We all want our children to be successful in life. Many people, on the arrival of a newborn, quickly set up an education fund for them, looking to the future of the child. Although this is admirable, there are common sense considerations to make when making this decision. We discuss them here.
The Pros and Cons
Every year, thousands of freshly graduated students make the trek from home to college, armed with tuition paid by parents and a credit card. They have carte blanch to be on their own, make life decisions and do their thing. If Mom and Dad are footing the bill, and there is no real funding on the child’s part, the chances of them spending their time partying and enjoying their new found freedom are very great. Meanwhile, Mom and Dad, the long-suffering parents who had the grand notion of providing their child with an education, are facing retirement with all their disposable income tied up in college funding, not in a retirement plan.
There must be a better way to deal with this. Coverdells and 529’s Both the Coverdell (educational savings account) and the 529 plans allow you to save for college tax-free. Both have distinct advantages and disadvantages. Let’s look at these:
Advantages
- Both plans are tax deferred. ·
- Coverdell plans can be used for children in school grades K-12. The plan is popular with people who wish to send their children to private or religious schools.
- A 529 plan assures tax-deferred growth and federal income tax-free withdrawals when used for qualified education expense.
- The account owner maintains control over all of the funds in the 529 College Savings Account.
- The Coverdell ESA is also controlled by the account owner.
- The 529 offers gift and estate tax planning benefits. Disadvantages · Tax law prohibits ESA funding once the beneficiary reaches age 18 for Coverdell accounts.
- If more than one person contributes to the fund, tax laws may kick in with a Coverdell account. Cap is currently $2,000,00.
- The Coverdell must be closed when the beneficiary turns 30, making tax planning a challenge.
- A 529 plan is affected directly by what is offered by the state you live in. · If the money is not used for educational purposes, you will pay stiff penalties. · Some states will place a 10% penalty fee on a 529 for early withdrawal. Consider
Your Own Finances
Experts say to consider your own financial well being before investing in anything concerning your child’s education. Remember, tuition will only go up each year, and if you are unable to save a significant amount each year, you may never reach this ceiling. Never sacrifice your own personal financial well being for a child’s education fund. There are vast differences in private and public colleges when it comes to tuition. A good community college can lead a child on to success without sacrificing your own retirement plans.
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