How Arizonans Can Get Their Child’s College Savings on Track
September is College Savings Month, a time to celebrate higher education and stress the importance of starting that savings early. From regular savings accounts to Coverdell Education Savings and 529 plans, there are plenty of ways to prepare your future graduate for financial success in college.
Regular accounts
Opening an account for your child at your preferred financial institution is a fantastic way to get your young scholar started. In addition to regular savings accounts, for higher earning potential, you could also consider opening an investment certificate or a money market savings.
Investment certificates are savings accounts with locked rates and terms that give you the ability to earn more interest in your initial deposit. Keep in mind that there are minimum deposit requirements and penalties, so you’ll want to ensure you don’t need access to the funds until maturity.
Money market accounts, while typically not as high-paying as investment certificates at lower balances, offer higher rates than regular savings accounts once you reach a minimum amount. Do your research and select the account that fits your financial situation and goals for your child’s college fund.
Coverdell Education Savings
A Coverdell Education Savings Account, or ESA, is a type of IRA set up for education expenses for the beneficiary. With Coverdell, if the funds are used for qualifying expenses, earnings are tax-free. Contributions are limited to $2,000 annually and there are income restrictions to open an account. These accounts are considered self-directed, which allows more freedom and options for investing.
Account opening and contributions must be completed before the beneficiary reaches 18 and funds from these accounts must be used before the beneficiary reaches 30 or can be transferred to another individual under the age of 18. Beneficiaries with special needs are not generally subject to these age restrictions.
529 plans
One of the most popular options for college savings is a 529 plan. Unlike Coverdell, contribution limits on 529 plans are not set by the IRS but by the state where the account is held. A 529 has limited investment options and typically runs through a financial adviser for better long-term growth. Because of this, you’ll want to pay attention to management fees and administrative costs, which can vary by plan.
The money in a 529 plan grows tax-deferred, and withdrawals are tax-free when used for qualified education expenses. Some states also offer state tax deductions or credits for contributions made to their sponsored plans.
College Savings Month is a great time to remember that investing in your child’s education is one of the most impactful financial decisions you can make and starting early is key. Whether you choose a traditional savings account, an ESA, a 529 or a combination of accounts, getting your child set up is sure to put them on the path to success. Take this month to research options, set goals and make a solid plan for your future graduate.
By Rachel Caballero | TruWest Credit Union
