Saving for College in a Recession: 3 Tax-Free Ways to Have Your Money Earn Money
In a troubled economy, as college tuition continues to rise while the sinking stock market wipes out years of investment gains, it can be more important than ever for you to find more ways to save for your childâ€™s college education â€” especially when current studies show that parents are woefully unprepared to handle the costs of college. A recent survey conducted by major investment firm Fidelity Investments â€” its second annual College Savings Indicator â€” revealed that parents today are projected to meet just 21 percent of their childâ€™s total college costs.
But put money into a dedicated college savings account while your kids are still young, and you could accumulate tens of thousands of dollars in nontaxable college funds by the time your children graduate from high school â€” thousands of dollars more than if you had just deposited the same money into a standard taxable savings account.
Here are three common college savings plans you can use to help you grow your money, tax-free, so you can stretch your savings as much as possible in the current economy and make every dollar count.
- 529 Plans
State-sponsored 529 plans, also known as â€śqualified tuition plans,â€ť are tax-advantaged savings plans that allow parents, other relatives, and family friends, regardless of income, to contribute toward your childâ€™s future college costs. Typically, youâ€™ll get to choose from a variety of investment options for those contributions, which the plan then invests on your behalf.
The most popular type of 529 plan is an age-based portfolio of mutual fund investments that becomes progressively more conservative as your son or daughter approaches college age.
You can set up a 529 plan online or through a broker (although the latter will cost you broker fees). Any earnings and returns on your 529 savings are tax-deferred and may even be released tax-free as long as you use the money for qualified educational expenses like tuition, fees, and room and board. In some states, you can even receive tax deductions for your contributions.
- Coverdell Education Savings Accounts
As with 529 college savings plans, Coverdell Education Savings Accounts allow anyone, not just parents, to contribute to the account â€” even your kids themselves can set money away in their Coverdell.
Unlike 529s, however, Coverdell ESAs are subject to both income and contribution limits: To be eligible to contribute to a Coverdell account, your modified adjusted gross income must be less than $220,000 if you file a joint income-tax return or less than $110,000 if you file individually, and total contributions to all your childâ€™s Coverdell accounts (you can set up more than one) are capped at $2,000 a year.
You can open up a Coverdell account with any financial institution that offers Coverdell ESAs, and you can choose your own investments. Your contributions wonâ€™t be tax-deductible, but the money you contribute can grow tax-free.
Any funds you eventually withdraw from a Coverdell account will remain untaxed as long as the amount you take out each year doesnâ€™t exceed your childâ€™s (the beneficiaryâ€™s) qualified education expenses for the year. Although Coverdell funds must be used for qualified educational expenses, you can use a Coverdell to help pay for elementary and high school expenses â€” including tutoring, uniforms, transportation, a computer, and Internet access â€” as well as college costs like tuition, fees, and required books and supplies.
- Spending Rebate Plans
When you sign up for a rewards program like Upromise or Futuretrust, a portion of the money you spend with retailers within the program network will be put toward a 529 college savings fund. The Futuretrust program also offers a Futuretrust MasterCard that will earn you a rebate at any retailer where you make a purchase using the card.
Youâ€™ll need to set up a 529 account for your child and then link that account to your Upromise and Futuretrust accounts. (Family and friends can also sign up for the Upromise or Futuretrust programs and link to your childâ€™s 529.) The money you get back from your purchases will be automatically deposited into your designated 529 savings account, where it can grow tax-free.
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