Even if you already have a 529 plan, you may want to consider establishing a Coverdell Education Savings Account.
It is one of the best-kept secrets and often overlooked when establishing a college savings plan. Investors have more flexibility and control of the investments—they can select any qualifying investment, including certificates of deposit, mutual funds, and tech stocks.
To invest in a Coverdell though, you have to meet the income guidelines: a maximum of $110,000 in modified adjusted gross income for single filers, and $220,000 for married filers.
Parents can make annual after-tax contributions of up to $2,000 per year per child, and the money can be devoted not only to college costs, but also to primary and secondary education. Earnings are tax-free, provided that the money is used for qualified education-related expenses.
Prior to establishing a Coverdell ESA, there are important considerations to address.
For example, current IRS guidelines do not permit contributions to an ESA once the beneficiary turns age 18. In addition, unlike 529 plans which afford more control to the beneficiary, your contributions will eventually be distributed to your child, even if he/she decides not to pursue higher education.
As far as qualifying for federal financial aid, a Coverdell ESA is considered an asset of the account owner, which is typically the parent.
Know, too, that time is of the essence. Unless Congress takes action prior to January 1, 2013, certain ESA benefits will expire after 2012. K-12 expenses will no longer qualify.
As always, be sure to consult with a tax professional to coordinate your withdrawals with the various federal tax credits.
Here are some more tips for saving for college if you’re the one going to college or just graduating from college:
1. Develop a spending plan. This will enable you to track your income and expenses.
2. Obtain a copy of your credit report. You can obtain a consolidated report which will include information from all three credit reporting bureaus (Experian, Equifax, and TransUnion) Credit will be very important as you transition to financial independence. Prospective employers may check your credit history, as will landlords and potential financial institutions should you need to apply for an auto loan. Remember, customers with excellent credit scores benefit from lower premiums on their car insurance.
3. Automate. Be sure to establish automatic monthly payments for your student loans. Customers who establish automatic monthly withdrawal from their checking accounts may receive 0.25 percent reduction in the interest rate.
4. Save. Pick a modest amount and commit to paying yourself first. Accumulating savings builds a cash reserve for any emergencies or opportunities that may arise. My advice is to create a firewall between you and your money. Establish an online savings account so that you can stay on track. You can establish a schedule of depositing a fixed amount every month on, say the 15th, or alternatively, you can determine to save a fixed amount, say $50, from every paycheck.
5. Invest. If you have secured employment, congratulations to you! Although it’s your first job and you almost certainly don’t envision yourself working there forever, be sure to enroll in your employer-sponsored retirement plan. I know it’s hard to think about retirement when you’ve just graduated. But by enrolling in your employer-sponsored retirement plan, you have the opportunity to invest and accumulate wealth. Don’t make the mistake of thinking, “Oh, I have student-loan debt, so I will start contributing when I pay off my student loans—contributing to your retirement savings early pays off down the road.”
Rita Cheng, CRPC®, CFP® is a Certified Financial Planner TM based in Bethesda, MD. She works with individuals and families to help them identify, clarify, and quantify their life financial goals and objectives.
Through her personalized approach, she educates and empowers her clients to plan for their personal financial future. She proudly serves as a CFP Board Ambassador to help raise awareness in the public at large, policy makers and media about the benefits of competent, ethical financial planning.
Since January 2012, she has been the president of the Financial Planning Association of the National Capital Area.
For more information, visit www.ameripriseadvisors.com.