When should you start planning for college?
Everyone is aware that college costs continue to spiral upward. So, the short answer is, the sooner the better. We have found that preparing for college should ideally start as early as possible, and in conjunction with your other financial objectives. If you started planning late, it’s not a hopeless situation by any stretch. Starting planning later can still help you lessen the impact of sending a child to college.
How does a 529 work?
A 529 is a tax-advantaged investment account that allows contributions to grow tax-free. Some states offer a tax break for the contributions themselves. Distributions from the account are not taxed if the money is used for qualified k-12 or college expenses.
How does an educational IRA work?
An education IRA allows you to save and withdraw funds tax-free when used for educational purposes. These accounts are also referred to as “Coverdell accounts” or education saving accounts (ESA). Even though such accounts informally carry the “IRA” moniker, they are for educational expenses only, not retirement savings.
What’s the difference between an Education Savings Account (ESA) and a 529?
The most significant difference is the way you invest the money. With an ESA, you can choose almost any kind of investment option, including stocks, bonds, and mutual funds. In contrast, 529 plans are state sponsored, so your investment choices are limited to what that state allows. Another difference between the two is that an ESA offers more flexibility and more freedom to customize the account to your risk tolerance; however, with a 529 plan, you can contribute more each year to the account.