For many people, helping to pay for their children’s or grandchildren’s education is one of their main financial goals. As a Financial Advisor in Murfreesboro, TN, educational savings is a common topic of discussion. It’s admirable to want to put your wealth toward bettering the next generation. It is truly a gift that keeps on giving!
What education savings programs are right for you? A 529 plan is one of the most common educational investment options, but there are other choices. We'll provide a summary of some popular methods of educational savings.
A 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary. These educational expenses could include a variety of things, including tuition for college or K–12 education, apprenticeship programs, or student loan repayments.1
The main benefit of a 529 plan is that the contributions grow tax free, and if the money is used for eligible educational expenses, the withdrawals are also tax free. Parent's grandparents, or other individuals can make contributions to a 529.
Another benefit of 529 plans is that they don’t have any annual contribution limits (although depending on where you live, they may have a lifetime contribution limit). This means you can save as much as you want for your family’s education. However, you may have to pay a gift tax if you contribute more than $17,000 in 2023.3,4
Finally, the beneficiary for a 529 plan is transferable, which means that if your intended beneficiary doesn’t end up using the funds for education, you can transfer the account to another beneficiary in your family. This could include a spouse, in-laws, children, nieces, or nephews, first cousins, aunts, uncles, or in-laws.5
Educational Savings Account (ESA)
An education savings account, or ESA, is another educational savings program available to people who want to help contribute to their child’s education costs. Although similar, there are a few differences between an ESA and a 529 plan.
With ESAs, there is less flexibility regarding contributions and withdrawals. One primary consideration is that you can only invest $2,000 per year per child in an ESA. In addition to this contribution limit, there are income level restrictions. You can only use an ESA if you make less than $110,000 as an individual or $220,000 as a married couple filing jointly.6,7
Finally, there are more restrictions when it comes to the beneficiary. A 529 plan has no restrictions on the beneficiary’s age. With an ESA, you can only open accounts for beneficiaries who are under 18 and can only make contributions until they’re 18. Also, all funds need to be withdrawn before the beneficiary turns 30.6
Similar to a 529 plan, your contributions grow tax free and can only be used for educational expenses. One difference is that ESAs include other K–12 expenses outside tuition, while 529 offer only a limited amount for these years of education.
Contributing to your loved one’s education is beneficial for them and can be a smart strategy for saving on taxes for you. Whether you invest in a 529 plan, an ESA, or another option, saving for the future is always a good idea. If creating a pathway to education for your child or grandchild is important to you, we would love the opportunity to connect.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
Investors should carefully consider investment objectives, risks, charges, and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors. Before investing in any state's 529 plan, investors should consult a tax professional. If withdrawals from 529 plans are used for purposes other than qualified education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.