It may only be a penny…but a penny saved is a dollar earned. Those pennies can and do add up, especially when we’re talking about college savings plans that grow tax-free. Stick around for a look at tax-free college savings plans that help convert those pennies into dollars the fastest.
529 Savings Plan
A state-sponsored 529 savings plan is a great way to save up for college. Here are the main points to consider:
- Both your earnings and your withdrawals used to pay for eligible expenses are tax-free.
- There are no income eligibility limits. This savings plan is open to everyone.
- There are also no age limits with a 529 plan. Anyone can save money to go to college, whether they’re 15 or 50.
- Most state-sponsored 529 savings plans convert a penny saved into dollars quickly, because there’s no limit on annual contributions.
- Contributions over the life of the plan may be limited. Some cap out at $300k.
- A 529 is not deductible on your Federal Income Tax return, but may be deductible on your State return.
- If the intended beneficiary of your 529 plan doesn’t end up going to college, you will need to designate someone else, because the funds can only be used for college expenses.
Coverdell Savings Account
A Coverdell Savings Account is available anywhere in the United States, and is also a fantastic way to save money for college. Here is what you need to know:
- There are income limits for a Coverdell account. You must be a single taxpayer earning less than $110k annually or joint taxpayers earning less than $220k annually.
- Although income limits apply, you don’t have to use only earned income to build the account. So a grandparent could contribute to your child’s Coverdell account.
- The beneficiary of a Coverdell account must be under 30 years of age.
- There is an annual contribution limit for a Coverdell account. For example, in 2010 the annual limit was $2000 per child.
- Coverdell accounts are not deductible on either Federal or State tax returns.
- A Coverdell account can be opened at any bank, insurer or brokerage firm.
Decide which fits your situation better, then start either a 529 Savings Plan or a Coverdell Savings Account to turn a penny saved into a dollar earned!