More Ways to Save for College
With these additional resources available to help you save for college, your dream of obtaining higher education may be closer than you think.
Coverdell Education Savings Accounts (ESAs)
Coverdell Education Savings Accounts (ESAs), also known as "Education IRAs", are quite similar to 529 savings plans. They allow for tax-free growth and give investors the option of devoting their money toward several different investment funds. Whether investors prefer to allocate money toward individual stocks, mutual funds, or bonds, when it comes to contributing money to an ESA, the choice is theirs.
ESAs include a contribution limit of no more than $2,000 annually. If you can foresee a desire to invest more than that amount each year, then you may want to consider investing in a 529 savings plan as an alternative. Each account offers tax-free withdrawals as long as they're made for qualified educational reasons. Withdrawing funds for unqualified reasons could result in heavy tax penalties.
Custodial Accounts
Custodial accounts are also known as "Uniform Gifts to Minors Act (UGMA) accounts" or "Uniform Transfers to Minors Act (UTMA) accounts." They are similar to traditional trusts in that they reserve funds for minors until the minor reaches 18 years of age and can legally take control of the account. However, unlike a trust, which is managed by a trustee, a custodial account is managed by a custodian. This person controls the investment strategies of the account and acts in the best interests of the minor.
Custodial accounts are normally less expensive and less of a hassle to manage when compared to trust accounts. They offer a line of protection for investors by limiting the beneficiaries' access to the account funds until they reach the legal age of adulthood.
Taxable Brokerage Accounts
Taxable brokerage accounts offer investors the widest amount of freedom in terms of investing and withdrawing funds. Although all capital gains and dividends are taxable with these accounts, the specific investment strategy usually falls under the discretion of the individual investor.
Investors can use taxable brokerage accounts to put their money toward any combination of mutual funds, individual stocks, or individual bonds. Typically, brokers will charge a small fee for each investment transaction, and by definition, the capital gains and dividends earned by these accounts will be taxed. However, what makes taxable brokerage accounts so attractive is that there is no limit to the amount of contributions or to the time that the account can remain active.
Get Started Today!
With careful planning, these saving strategies can offer huge rewards for prospective college students. No matter which strategy you choose, though, be sure to start saving early. The earlier you invest, the more interest your investment will earn. By incorporating that interest into additional investment strategies, you can truly maximize your overall savings.
