When it is time for your children to go to college, they will need a lot of money. The cost of education is rising year by year, a factor that makes it very difficult for you to fund your child’s education. But you can easily give your child a college education if you make the necessary financial preparations for it when your child is very young. You can do so by starting an educational fund and letting it grow. The best solution for you is a tax free savings account for your child’s college education.
1. 529 Account
You can use any of the several tax free savings accounts available to raise a fund for your child’s education. The 529 account is immensely popular.
You have to pay taxes for the money you deposit in a 529 account. But you don’t have to pay annual taxes on the interest, and you are not taxed for the money you withdraw from a 529 account on condition that you use it only to meet your child’s educational expenses such as books, tuitions, accommodation, and so on.
In a 529 account, the maximum annual amount you can deposit is $200,000. You need a money manager to handle the funds you contribute to a 529 account. The biggest advantage of this plan is that the money in the 529 plan is the property of the owner of the account. If the parents of the kid set up this account, the kid stands a better chance of getting the required financial help.
If one of your children is averse to a college education, you could spend that money on another of your children who might long for an education.
2. Coverdell Education Fund
The Coverdell Education Fund is yet another tax free savings account to raise funds for education. Basically, it is the same as the 529 plan, but with a few differences.
The maximum amount you can deposit per year in a Coverdell Fund is only $2000, which won’t be insufficient if you have begun saving for your child’s education very late in life. However, you don’t need a money manager here, and you are in total control of your Coverdell Fund.
The biggest disadvantage is that the Coverdell Fund belongs to the student, which he or she can misuse and therefore, get lesser financial aid. Your child owns the money that you put in a Coverdell account and gains complete control over it once he or she turns 21. Children could misuse this money and spend it on things other than their college education. This won’t happen in a 529 plan.
You are the best person to decide which is the best type of tax free savings account to fund your child’s college education. Education is expensive, and to give your child the best there is, creating a fund at the earliest possible is absolutely necessary.