Are you already worried about trying to save for your children’s future education related expenses? In today’s economy, millions of taxpayers are struggling to pay their bills let alone save up for future bills. It may seem overwhelming to be thinking about a day when you will have to help your child earn their diploma, but by preparing early you can avoid expensive loans twenty years down the road.
It is a common misconception that only very wealthy families can save for their children’s future. In fact, there are multiple educational savings plans that were made especially for middle-class and low-income households. To help those of you looking to get a head start on the process, please enjoy the following article on tax friendly ways to save for your children's education.
1. Coverdell Education Savings Account
If you are looking for a way to avoid taxes and fees when you withdrawal your child's education money in the future, then a Coverdell Education Savings Account (ESA) is the way to go. It allows you to contribute $2,000 per year until the beneficiary is 18 years of age. Although the contributions are not tax-deductible, the distribution cash will become tax-free when withdrawn in the future. However, the funds must be used only for school expenses. For more information on opening a Coverdell ESA check out this page on IRS.gov.
2. 529 College Savings Plan
529 programs are among the popular ways for parents to save for their children’s future educations. While the specific details will vary depending on the state you reside in, there are two general types of 529 plans to choose from. The most popular is known as a College Savings Plan, and it will allow you to select between various investment options. You will not be taxed on the returns from your investments, and can use the money later on to pay for books, tuition, etc.
3. 529 Prepaid Tuition Plan
The second type of 529 plan (the Prepaid Tuition Plan) is commonly called the “early bird special.” It works a bit like rent control, allowing you to pre-purchase tuition now based on today’s prices. The tuition fees will then be locked in place until your child is old enough to utilize them. This plan is especially beneficial in today’s economy, but be sure to check with your local laws before making any investments.
4. Savings Bonds
There are special bonds called Savings Bonds for Education, which work quite well when invested in early enough. If a taxpayer passes income qualifications, they can put money in to the bond and it will be tax-free when used later for educational expenses. A great benefit to educational savings bonds is that the funds can be withdrawn by the parents in the event of a financial emergency.
5. Tax Credits
If your child is already a little bit older, and you have little or no money saved up, then do not give up. There are several credits, deductions, and tax advantages that your child may still be eligible for, both before and after enrollment. The front-runner this year is the American Opportunity Tax Credit, which has been extended and improved by the Obama administration. Other credits include the lifetime learning credit, classroom expenses deduction, and deductions for higher education tuition and fees.
If you need help choosing the right choice, you can always enlist the help of a knowledgeable tax professional. You will also want to avoid taking advantage of more then plan with out first verifying the legality of such a choice. Unfortunately, the IRS will rarely allow a taxpayer to claim more than one large educational plan on their tax return.