Similar in some ways to an IRA or 401K, 529 Plans are state-specific investments plans with a designated beneficiary – the student for whom you are saving. The money put into the 529 Plan is invested you’re your choice of options offered by the provider. Though contributions to the 529 Plan aren’t deductible on federal tax returns, the money invested grows tax-deferred and any money used to pay for qualified college expenses are federally tax-free. There are many benefits of 529 Plans, though contributions are limited to the amount necessary to provide for the qualified education expenses of the beneficiary. 529 Plans must be purchased directly from the 529 Plan manager or through a financial advisor such as the wealth managers in On Tap Credit Union’s Investment & Retirement Center.
Another option is a Prepaid Tuition Plan through which you effectively purchase tuition credits for future education at today’s rates. There are currently 13 Prepaid Tuition Plans (sometimes called guaranteed savings plans) offered by 12 states and one not-for-profit organization. Although anyone can participate in any states 529 Plan, you can learn more about Colorado’s 529 Plans here.
Education Savings Accounts
Educational savings accounts (ESA) can be used in addition to a 529 Plan, with contributions to both for the same beneficiary in the same year. The interest earned on the money you put into an ESA grows tax-deferred, and withdrawals for qualified education expenses are tax-free. Contributions to an ESA are limited to $2,000 per beneficiary per year.
If you’re unable to save enough in advance of your children reaching college age, don’t despair! Financial aid is often an option, either through the federal government or the specific school your child plans to attend, and numerous scholarships are available through the school or through service organizations or other businesses. For example, On Tap Credit Union awards two $1,000 scholarships to credit union members each year. You can learn more about scholarships here.
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