College costs continue to rise, making it more important than ever to plan ahead. The earlier you begin saving, the less your family may need to rely on student loans.
Here are three of the most effective ways to save for your child's education.
529 Plans
A 529 plan is the most popular college savings vehicle—and for good reason. Contributions are made with after-tax dollars, but investments grow tax-free, and withdrawals are tax-free when used for qualified education expenses, including tuition, room and board, required fees, and textbooks.
Additional benefits include:
- High contribution limits with no income restrictions.
- The ability to "superfund" five years' worth of annual gift tax exclusions in a single contribution.
- Flexibility to change the beneficiary to another qualifying family member if plans change.
- The opportunity to roll eligible unused funds into the beneficiary's Roth IRA, subject to IRS requirements and lifetime limits.
Coverdell Education Savings Accounts
Coverdell ESAs also offer tax-free growth and tax-free withdrawals for qualified education expenses. However, they have a $2,000 annual contribution limit and income-based eligibility restrictions.
For families who qualify, Coverdell accounts can be a valuable supplement to a 529 plan.
Roth IRAs
Although designed primarily for retirement, Roth IRAs can provide added flexibility for education planning. Contributions can be withdrawn tax- and penalty-free at any time, and qualified higher education expenses can avoid the 10% early withdrawal penalty on earnings (though income taxes may still apply to earnings if withdrawal rules are not met).
A Roth IRA can be an excellent option if you're unsure whether your child will attend college or if you'd like to prioritize retirement savings while maintaining flexibility.
Which Option Is Right for You?
The best college savings strategy depends on your family's goals, income, and overall financial plan. Starting early—even with modest contributions—can make a significant difference over time.
If you'd like to create a college savings strategy that's tailored to your family's goals, we're here to help. Contact us today to get started.
OneAscent Financial Services, LLC (“OAFS”), d/b/a The Cornerstone Financial Group, is a registered investment adviser with the United States Securities and Exchange Commission. OAFS does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by OAFS or any unaffiliated third party. OAFS is neither an attorney nor accountant, and no portion of the presented content should be interpreted as legal, accounting, or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.