Project $160K

There are several options for saving money for your child’s education.  For example, an educational saving accounts (ESA), a 529 plan, or just a vanilla investment account.  Obviously, there are associated requirements, benefits and drawbacks for any account. 

Both the ESA and 529 have tax-advantages over a vanilla investment account.  With an ESA the student will not have to pay taxes on earnings or contributions – however, if money is withdrawn for non-education expenses, there is a penalty of 10% + an income tax.  And the ESA limits the maximum investment to $2,000 per year and depending on an individual’s income, the actual investment may be lowered to only a partial contribution.  Further, in order to qualify a married couple must make less than $220K per year.  

A 529 plan is an education savings plan operated by a state or educational institution designed for setting aside funds for future college cost.  And everyone is eligible – no income limits.  Using a state plan might provide tax benefits, and the plan can be used for out of state colleges.  An individual can deposit up to $14,000 per year into the plan will qualify for an annual gift tax exclusion - $28,000 for married couples filing jointly.  The investment in the plan grows tax-free and is only taxed when withdrawn – much like a 401K plan.  And can be used for tuition, books, room & board, and required equipment. Like the ESA, if money is taken out for non-qualified uses then a 10% penalty is applied along with the income tax.  However, there are exceptions to the penalty – e.g. disability, attending a U.S. Military Academy, or student scholarships.

Finally, a vanilla investment fund doesn’t have the tax-advantages, but also doesn’t have the income limitations or penalties for withdrawals. 

We decided to use a 529 plan for our daughter because we qualify (e.g. like everyone), and we plan to use the fund to cover tuition and books only.  We invested $500 dollars to begin the account – with $100 in Real Estate Investment Fund, $200 in Stock Index Fund (e.g. SP500), and $200 in International Index Fund.