3 Critical Considerations For How To Save For Your Child’s or (Grandchild’s) Education - Part 1
CONSIDERING COLLEGE SAVINGS OPTIONS: 529 PLANS, ESAS, AND EDUCATIONAL TRUSTS
If you're planning to save for your child or grandchild’s college education, it’s essential to explore whether a 529 plan, an education savings account (ESA), or an irrevocable trust would best suit your needs. Here are key factors to consider as you make this decision:
Firstly, think about whether you want your child to have more flexible education options beyond traditional college paths. In recent years, college enrollments have declined significantly, with many students exploring alternative routes such as gap years, vocational programs, and online courses. If you value this flexibility for your family, traditional college savings plans like 529s may not align with your goals.
Secondly, consider the impact on financial aid eligibility. How you save for college can influence your child's ability to qualify for financial aid beyond student loans. It’s crucial to ensure your savings strategy doesn't inadvertently disqualify them from potential assistance.
Thirdly, evaluate the tax implications of your savings approach. While income earned on savings is typically taxable unless stored in a retirement plan, certain college savings plans offer tax deferral or exemptions. Understanding these tax benefits can help optimize your savings strategy.
529 Plans & Education Savings Accounts (ESAs)
529 plans have been popular since 1996, offering tax advantages for education expenses. Contributions grow tax-deferred, and withdrawals are tax-free if used for qualified education costs like tuition, room, board, and related fees. Many states also offer tax deductions for 529 contributions, making them an attractive option.
Additionally, 529 plans have high contribution limits, with no annual cap on contributions. However, exceeding the annual gift tax exemption limit (currently $16,000) may trigger federal gift taxes and require filing a gift tax return. Automatic transfers and low minimum contributions further enhance their appeal.
It’s important to note that 529 funds must be used for eligible expenses to avoid income taxes and a 10% penalty. Limited investment options and penalties for non-qualified withdrawals are considerations if your child opts out of college.
Education Trusts
An irrevocable trust offers an alternative to 529 plans, focusing on financial aid eligibility rather than tax deferral. Income earned by trust assets isn’t tax-deferred, but strategic trust structuring can help beneficiaries qualify for financial aid that might be inaccessible with a 529 plan. If financial aid eligibility outweighs tax savings on trust income, this option may be preferable.
Looking Ahead
Next week, we’ll delve deeper into educational trusts in part two of this series. For now, consider what priorities matter most to you—tax efficiency, financial aid flexibility, or investment diversity. If an educational trust aligns with your legal and financial goals for your loved ones, reach out to discuss how to integrate this option into your planning.
By understanding these savings options and their implications, you can make informed decisions to support your child or grandchild’s educational journey. Contact us today to explore the best approach for securing their future education.
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This article is a service of Zarda Law, S.C. We do not just draft documents; we ensure you make informed decisions about life and death, for yourself and the people you love. That's why we offer a Legacy Planning Session, during which you will get financially organized and make all the best choices for the people you love. You can begin by scheduling a Legacy Planning Session and mention this article to find out how to get this $750 session at no charge.
