Every year since I went back to school, my university has approved a tuition increase and that seems to be the norm for schools across the board. Now, more than ever, it is important to start saving for college as early as possible. Many of our clients participate in 529 Plans. As long as those funds are used for qualified education purposes, they are tax free when you withdraw them. Additionally, in the State of Michigan you receive a tax deduction on your state return for contributions made to a MI 529 Plan.
But this is not the only option. Coverdell Education Savings Accounts tend to be more flexible in the type of investments you can make within the account but the maximum annual contribution limit is only $2,000. As with the 529 Plan, any withdrawals are tax free as long as they are used for qualified education expenses but the ESA expands its allowance to include elementary and secondary education expenses in addition to college.
Lastly, you can always set up a regular but separate investment account either in your child’s name with you as the custodian or in your own name. This will give you complete flexibility to contribute as much as you are able to and invest as you like. Additionally, you can avoid penalties if your child chooses a different path later in life. But you also miss out on the tax benefits of an official education plan. Do your research to find out which option is the best for you, but remember to start early!
This is a guest post authored by Emily Fishwick of Numerico, PC.
