A Plain English Guide to College Savings Plans.
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First and foremost, make sure you're maximizing your retirement savings options, or are otherwise on track to hit your retirement goals before you begin a college savings account. Remember, you can scrap, scrape, and finance college if needed, but you cannot finance retirement!
There are two primary tax advantaged college savings plans: a Coverdell Education Savings Account (or ESA), & a 529 plan.
A Coverdell works very similar to an IRA. The Coverdell ESA provides a tax advantaged umbrella over the actual investment, which can be stocks, bonds or mutual funds. The ESA funds can be applied to qualified elementary and secondary schools as well as college. If all money in an ESA is applied to qualified education expenses, not taxes are owed, but the funds must be withdrawn before the age of 30, otherwise the IRS taxes the money and makes you pay some fees.
A 529 requires you to choose between state run programs, so you don't get the same investment options as an ESA, but with a 529 plan you also don't have a maximum contribution, and there's no age limit for withdrawal.
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