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College Savings Plan

As college education is an integral requirement to obtain a decent job in today’s competitive economy, families need to be proactive and start saving earlier before their children reach the college-going age. The government, both federal and state, also encourages such progressive thinking through the establishment of college savings plans such as the 529 Plan and the Coverdell Education Savings Account (Coverdell ESA), to name a few.

529 Plan:

A 529 Plan is a college savings plan that offers the savers unmatched tax advantages. It has two types: prepaid tuition and saving. As the name implies, using the prepaid tuition 529 plan, you can buy college tuition expenses at today’s rate. Of course, this can’t be any school; you can only buy tuition from qualified schools in the state in which the plan is in place. On the other hand, the 529 college savings plan invests your money into schemes that you approve, some of which are offered by well-established fund managers like Merrill Lynch and Fidelity. There’s no tax on the accruing interest in the account; moreover, there’s also no tax when money is withdrawn to pay for college as long as the withdrawal doesn’t exceed the qualified educational expenses. Educational expenses that are qualified for a 529 college savings plan include tuition, books, and supplies. Room and board expenses can also be paid with this money if the student is enrolled at least half time. Remember that the details of each 529 plan may differ on the basis of the state in which it is operational.

Coverdell Education Savings Account:

Coverdell ESA is similar to 529 college savings plan as it’s also a tax-advantaged investment account; however, there’s an upper limit of $2,000 on the total contribution per year. Also, you can use the money for elementary and secondary school beside college. The beneficiary of the account has to be under the age of eighteen; in special circumstances, he/she can be older. Moreover, other family members and friends can also contribute towards the account as long as the $2,000 limit is met.