Tax incentives can be your answer to a more stress-free approach to college savings. Paying for college can be a burden for most people, but there are a variety of paths you can take to make it less of a headache. Tuition fees has increased by so much over the years; now is time to start exploring different and more efficient ways to save money.
As reported by The College Board “the average 2012-2013 tuition increase was 4.2 percent at private colleges and 4.8 percent at public universities”. Students, parents, and even grandparents should immediately take advantage of any tax breaks the government has to offer. Tax credits and incentives like Coverdell Education Savings Accounts (ESA), the 529 Savings Plans, and US Savings Bonds can easily be more reliable than depending on loans and scholarships. Planning ahead and being knowledgeable about the help that is available to you can be very beneficial. It will give you a chance to maximize your savings on college fees, while making a smooth transition into college.
It is becoming more and more popular to plan for college funding early on. College is so expensive it has now become an added concern for families and especially for new parents. Saving up money for a child to go to college is important to most people, but figuring out the best way to go about it can sometimes be a hassle. Coverdell Education Savings Accounts is one of the many tax benefits that can assist with saving on expenses while preparing a college fund for the future. If you plan to go the Coverdell ESA route it’s important to find out everything you need to know about the process.
According to the IRS Publication 970, the Coverdell ESA is “a savings account that is set up to pay the qualified education expenses of a designated beneficiary”. The IRS publication also explains that anyone can open up one of these accounts but the beneficiary has to be under 18 years old. The funds must be in cash and placed in an account at any bank that offers Coverdell ESAs.
The reason why this specific account plan helps with college savings is because the money deposited is tax-free and so are the withdrawals, as long as they are applied to eligible education expenses. Also, be aware, there are limitations and qualifications you must follow. Any individuals that contribute to the account must not have earned over $110,000 as a yearly income or $220,000 if they filed a joint return. The total amount that can be put into the account is capped off at $2,000 a year, so if you open up a Coverdell ESA account early enough, these savings will definitely come in handy when it time for the beneficiary to go to college.
Now if you’re looking for a program that allows you to save larger amounts of money, a 529 Plan might be the way to go. These are also known as Qualified Tuition Programs. CNN Money claims that 529 Plan it is slightly more complex than the Coverdell ESAs and that they are perfect for those wanting to contribute more money. There is one limitation; the amount of money saved cannot go beyond what is necessary to cover the qualified expenses for the student.
There is a 529 Prepaid Tuition Plan and the 529 Savings Plan. The IRS Publication 970 states, that these plans are “operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild”. It also explains how the 529 Prepaid Plan is set up with a university so it is more restrictive because you might not be saving enough money to cover all college expenses. Having the 529 Prepaid Plan means you’re investing your money toward current college prices, which is obviously not the smart thing to do, especially when you know the cost of tuition is always on the rise.
Deciding to go with a 529 Savings Plan gives you more room to keep up with the increase of college costs. Anyone is allowed to set up a 529 Plan account in any state they choose. Each state has their own 529 Plan and those states work with investment companies to establish the plan of your choice. Similar to the Coverdell ESA both these plans funds are not subject to federal or state taxes when they are properly used on certain college expenses.
Not everyone plans ahead for school and sometimes last minute issues come up, so that’s when tax savvy college savings can really come in handy. If you or your parents have funds in savings bonds there is a way to use it to help you with college savings. Some people invest their money in saving bonds, which makes perfect sense taking into account the way our economy fluctuates.
The U.S. Department of Treasury declares that savings bonds keeps our money safe from any changes in the financial market and are free from local and state taxes. Fortunately, those are not the only advantages of having a US Savings Bond. IRS Publication 970 states, “generally, you must pay tax on the interest earned on U.S. savings bonds. If you do not include the interest in income in the years it is earned, you must include it in your income in the year in which you cash in the bonds.
However, when you cash in certain savings bonds under an education savings bond program, you may be able to exclude the interest from income”. It also explains that you can only qualify with the series EE bond if you purchased it after 1989 or the series I bond. Of course this money can only be applied to what is considered Qualified Education Expenses, which also includes the tax-free portions of Coverdell ESAs, 529 Plans, grants, or scholarships.
It is imperative not let the pressures of paying for college get to you. Using tax benefits is one of the most accessible ways to save money on college. All of the information you need is right at your fingertips, so use it to your convenience. College debt is one of the worst types of stressors, stay away from going down that road as best as possible.