One of the greatest financial stressors parents face is how to pay for their child’s college education. Setting aside money can be difficult, but there are options out there – many of which allow for money to grow tax-free when used for future education.

1. Section 529 plans. A 529 plan (qualified tuition plan) allows for money to be saved and grow tax-free as long as it is used for payments to educational institutions. The owner of the account (typically a parent or grandparent) has control of how to invest the funds. When the beneficiary (child/grandchild) goes to school, funds can be withdrawn and any amounts used for qualified payments are tax-free. Most states offer this type of plan and the added benefit is deducting the contributions (typically up to $5,000 if filing single and $10,000 married) for state tax purposes, allowing instant savings on the amounts contributed.

2. ROTH IRA. A ROTH IRA is typically used as a vehicle for personal retirement savings, however, it can also be considered for college. ROTH contributions do not provide current tax savings, but investments grow tax-free. Normally, earnings cannot be withdrawn before the account holder reaches the age of 59 ½ without incurring a 10% penalty. However, there is an exception for higher education. Plus, contributions paid-in throughout the years can always be withdrawn tax-free, regardless of age or purpose. The benefit of this strategy is money can be saved for retirement, but also be a backup plan for funding college costs.

3. Coverdell Education savings account. This is a custodial account that allows contributions up to $2,000 per year for children under18 years of age. The investments will grow and can be withdrawn tax-free as long as the amounts are used for qualified education. The main draw of these accounts was the ability to not only use funds for college but also qualified elementary and high school costs. Even though the rules for 529 plans have expanded in recent years to allow these costs as well, Coverdell accounts do still provide many good investment options, sometimes with lower account costs.

If you want more information on college savings plans or need help with tax preparation, contact our tax professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.

Written By CPA, Justin Anderson