529, Roth or Coverdell - Which One Is Right for You

Familiarize yourself with the most common education saving plans.

When you’re ready to start thinking about saving for your kids’ college funds, it’s time to learn about the different types of education-based savings accounts. Here are three of the most common options:

529 Plan

A 529 Plan allows you to save money for any level of education (including graduate school) and apprenticeships. The contributions made to this type of account are not subject to taxes as long as the funds only pay for the beneficiary’s education expenses.

A 529 Plan has some stipulations.

1. The funds have to be used for their intended purpose, otherwise, those funds are subject to taxes AND a 10% penalty fee.
    
2. While there aren’t yearly contribution caps, there is a lifetime contribution cap of $500,000.

Roth IRA

When you think of a Roth IRA, you may assume it's strictly for retirement, but that isn’t true. A Roth IRA can help pay for an education, but like a 529 Plan, there are a few stipulations.

1. Unlike some other college saving plans, contributions made to a Roth IRA are not state tax deductible.
    
2. The money can only be used for college. The funds can't pay for high school or trade school.

The contribution limit made to a Roth IRA is $6,000 per year. These contributions and earnings grow tax-free and the withdrawals from the account are also tax-free.

A great thing about using a Roth IRA as part of an educational fund is that if there are leftover funds, the beneficiary can use them in retirement.

Coverdell Education Savings Account

Coverdell Education Savings Accounts are created to help families fund educational expenses. Anyone can create this type of account as long as you’re over 18, and have the beneficiary’s full name, date of birth, Social Security number and address.

Just like with the previous options, there are some stipulations for using this type of account.

1. There are only some schools that allow Coverdell Savings Accounts.
    
2. Contributions have to be cash or a cash equivalent.
    
3. The beneficiary can only use the funds until they're 30.

The maximum contributions are $2,000 per year.

A Coverdell could be a viable option for families who fall below a designated income level and may not have other ways to pay for further education.

Every beneficiary can have more than one education-based savings account, so take time to decide which combination of these options can work for you.

When you’re ready to start saving for your children's education, contact the office so we can discuss.

Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.

Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state's 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state's 529 Plan.

^{A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.}