Savings Accounts for Children's Education

With the rising cost of education, it is important to begin saving early for a child's future. There are many options available when it comes to saving solely for education and many of them are tax free.

Education Savings Account (ESA)

Education Savings Accounts allow money to grow tax free if used for education expenses. The maximum amount that can be contributed per year is $2,000 per child.

ESA Certificates

ESA Certificates can be purchased in amounts of $100, $500 and $1,000. Certificates with longer maturities often pay higher rates, but there are penalties for withdrawing the money early.

529 Plan

529 plans are offered by states and differ between states. These plans are savings plans or prepaid plans (buying credits at in-state schools). There is no contribution limit for a 529 plan.

Custodial Accounts

Minors cannot own stocks, bonds, mutual funds and types of property, so parents can transfer these assets into a trust in the form of a custodial account, also known as a UGMA or UTMA account. These accounts are considered irrevocable gifts, and the trustee cannot be changed, nor the money and property taken back.

Education Expenses

Education expenses are considered tuition and fees related to college education. Money can also be used for textbooks and supplies. ESAs also cover primary and secondary education expenses.

References

• Internal Revenue Service: Tax Benefits for Education
• Congressional Research Reports: Saving for College