If you’re planning to cover a child’s future college costs, there are two savings plans to consider: a Coverdell Education Savings Account (ESA) or a state-sponsored 529 plan. Here are some basics to help you decide which plan may be right for you.
Use a Coverdell Education Savings Account (ESA) for college costs
A Coverdell ESA allows you to save money not only for future college costs, but also for qualified elementary, middle or high school costs such as uniforms or computers. A Coverdell ESA is not an investment account, but it earns dividends just like a Credit Union Share Account.
Parents and grandparents, or even extended family and friends, can open a Coverdell ESA in the name of a child. You can contribute up to $2,000 annually from all sources. Individuals who contribute to the account have to be within the annual income limitations. Check with the IRS for Coverdell contribution guidelines.
You can open a Coverdell ESA with any financial institution.
Meet college costs with 529 Plans
A 529 Plan is a tax-advantaged, state-sponsored education savings plan. North Carolina’s 529 plan offers investment options covering a range of risk strategies, from conservative to aggressive. A 529 Plan lets you choose how and when to invest funds, and when to use your funds. You can be as involved as you feel comfortable based on your investment risk level.
These plans help your family save for future college or graduate school expenses like tuition, room and board, books and computers. Individuals can contribute on the child’s behalf in one of two ways: up to $14,000 per year or a $70,000 lifetime contribution.
Remember, any type of investing comes with risk. Talk with the plan administrator or your financial advisor to help you find your comfort level. The NC 529 account is not a bank or credit union account. You can find more information at College Foundation of North Carolina or at NC529.org.
You may not have to choose one plan
Depending on your college savings goals, you may be able to contribute to both types of plans in the same year for the same child. Use a college savings calculator to help you determine how much you may need to contribute to meet your savings goals.
The advice provided is for informational purposes only.
Article provided by Local Government Federal Credit Union.