An education is one of the most valuable investments a person can make, but it can also be an expensive one. As their accountant, your clients may come to you with questions about the various types of college savings plans and which plan is right for them.
Types of College Savings Plans
The most common college savings plan is the 529 plan. A 529 plan is a state-sponsored tuition program that allows taxpayers to contribute money tax-free to a savings fund or prepaid tuition fund, the Internal Revenue Service (IRS) reported. This money can be used tax-free for college tuition and related expenses, such as fees, textbooks and course materials and, in some situations, room and board. Like retirement savings accounts, 529 plans make money through investments, BankRate reported.
These plans are becoming popular for a number of reasons, including the tax benefits and the classification of the funds as an asset of the parent rather than the child. This classification can help students avoid problems where the college savings they have prevent them from getting supplemental financial aid. It helps parents make sure the money is being used for an education as intended.
Another option for college savings are UGMA and UTMA plans. Special tax rates, like no tax on the first $1,000, minimize the tax burden on these savings, BankRate reported. Unlike with the 529 plan, there’s no penalty for using the money for expenses outside of education once beneficiaries reach legal adulthood.
A Roth IRA, more commonly used for retirement savings, can also be a vehicle for college savings once a minor begins earning income of their own. Parents can open the account in their child’s name once the minor starts that first job. This kind of account has a lot of restrictions, but money from it can be used tax-free at any age for “qualified education expenses,” according to BankRate.
Saving for a Child’s Education
Traditionally, college savings plans like the 529 have been used to save money for a child’s education. In fact, college savings may be one of the financial changes clients seek help with shortly after – or even before – having a baby. Parents may decide to start saving for their kids’ education at any time, but you can help them understand that the sooner they begin, the better.
Saving to Go Back to School
Not every college savings plan is designated for a child to use many years later. Taxpayers who are considering going back to school can set up 529 plans in their own name to reap the tax benefits while saving for a degree that will advance their career.
Affording a college degree isn’t easy, so it’s no wonder there are a few options of different accounts families can use to save money for college tuition. In your future accounting career, clients will come to you for advice – and having the knowledge and communication skills to help them will bring you success.