Saving for your child's or your own college education can be a challenging task. The cost of college has been rising steadily for years, but starting a savings plan early will help you prepare for the expense. There are a few different types of programs that can save you money.
The Coverdell Education Savings Account (ESA) was formerly known as an education IRA, according to the website Investopedia. These tax-deferred accounts allow you to invest money that can grow tax-free. The account can hold a variety of investments, including bonds, guaranteed investment certificates, mutual funds or individual stocks. When the money is distributed, it's tax-free, provided the distributions are less than the account holder's qualified education expenses.
The 529 plan is a state-run educational investment account where you can save money in qualified investments that will grow tax-free. Each state determines its contribution limits, but you can invest up to $12,000 per year per beneficiary without incurring the federal gift tax penalty, according to the Investopedia website.
U.S. Savings Bonds
If purchased after 1989, these bonds may be redeemed tax-free when the bond owner or beneficiary uses the proceeds to pay for college tuition and related fees.
Prepaid Tuition Plans
Prepaid plans allow you to pay for future college expenses using current rates. The plans are tax-deferred, and the proceeds can be used to pay for tuition to post-secondary institutions. Some states also allow you to use the money for additional expenses, such as room and board, though you should confirm your state's policy with the college financial aid office.
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