When you look at your kid, sometimes it’s hard to imagine that they’ll grow up and consider going to college.
The good news is that most military families start saving for college early. According to a FINRA Investor Education Foundation survey, 52 percent of military respondents with financially dependent children have started saving for college. Here’s a quick look at two of the popular save-for-college options.
Coverdell Education Savings Accounts (ESA)
Parents and students can start Coverdell ESAs as long as the beneficiary is younger than 18-years-old or is a special needs beneficiary. Account holders cannot deposit more than $2,000 a year for the same beneficiary, meaning no more than $2,000 can be deposited even across several accounts. The account grows without federal income taxation, and withdrawals can be tax free, too. Withdrawals go towards eligible institutions’ tuition, books, supplies and room and board. The Internal Revenue Service has more details on ESAs.
With a 529 savings plan you invest money in mutual funds. You decide what investment option you want and your account fluctuates depending on how well your investment option performs. There are also 529 prepaid plans in which you pre-pay for part or all of tuition costs. Basically, you buy tuition in today’s dollars, which is redeemable once your child enrolls at an eligible institution. Prepaid plans vary by state, so take a look at each state’s 529 plan. Maximum investments also vary, but surpass $300,000 for beneficiaries in certain states.
Starting an Account
Military families interested in Coverdell ESAs can start one with most banks, stockbrokers and mutual fund companies. Parents interested in the 529 plan can enroll on their own or hire a 529 plan expert. Either option gets you saving money for your child’s education well before he or she is even reading at a collegiate level.
Photo thanks to Paul Schultz under a creative commons license from Flickr.