4 Popular Options For Saving For Education

It is a well known saying that it is never too early to start saving for a child's education. By giving yourself a head start, you are giving more time for money to grow and weather the market's ups and downs. Both the federal and state governments have made it much easier to save for education. There are tax-favored choices that encourages people to make saving for education.

Four popular investment options for education:

Coverdell Education Savings Account is one of the most tax-favored college payment plans. Contributions are allowed with a maximum limit of $2,000 per child (under age 18) for contributors with modified adjusted gross income of $190,000 if filing jointly or $95,000 for single filers. The maximum is reduced and gradually phased out for those with modified adjusted gross income between $190,000 and $220,000 (joint filers) or between $95,000 and $110,000 (single filers). Those who exceed these income limits are not eligible to make contributions. The ESA also has the restriction that the funds must be used by the time the beneficiary reaches age 30. It has the great advantage of facilitating account holders to transfer the fund to another relative of the beneficiary.

Custodial Account (UGMA/UTMA) has the benefit of no contribution limits. Under this plan, for the current year 2007 and children under age 18, the first $850 of income earned is tax-free; income from $850 through $1,700 is taxed at the child's rate; income over $1,700 is taxed at the parents' rate. For those children whose age is more than 18, all income is taxed at the child's rate.

Prepaid Tuition Plans is another popular saving option mainly because of its higher contribution limits which depends on plan rules but typically ranges from $15,000 to $30,000. It has added advantage of Tax-deferred growth. Also, withdrawals are federal income tax-free if used for qualified higher education expenses. The only disadvantage with this plan is that it offers low rate of return.

529 Plans offers great flexibility in terms of contribution limits. Unlike other plans, where family income is the main criteria, here contribution limits are typically based on estimated cost of colleges in a particular state or region for 4 years (and in some cases, an additional 2 years). Also, the earnings are free from federal (and possibly state) income taxes. The withdrawals too are federal income tax-free provided they are used for qualified higher education expenses. It has big advantage over other plan that it may be used at any eligible higher-education institution in the U.S. and some abroad.

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