College Savings Accounts – All You Need to Know

Back to blogPosted by Lisa PetersonPosted on Banking 101

Saving for college is critical for many families, and it can weigh on a lot of people’s minds. The act of saving for college can be a big deal and a lot of hard work. It is important to know what kind of savings tactics and bank accounts are going to make it easy. There are a handful of accounts that are commonly used by families, parents, and students to help make paying for college less of a hassle: 529 Plans, Educational Savings Accounts (ESA’s), and Uniform Transfer/Gift to Minors Act (UTMA/UGMA). 

529 Plans

A 529 is by far the most commonly used and talked about account when it comes to saving for college. Each state has their own version of this account since it is state-sponsored, but you can apply for any state’s plan no matter where you live. Anyone can open up a 529 Plan, but that isn’t the only person that is able to contribute money towards it. Friends, family, and others can put money into someone’s 529 Plan. This plan is a very popular option for college saving because all withdrawals are tax free if used for educational purposes like tuition, books, and more. The money within the account will increase tax free and there are very few restrictions on the amounts that can be deposited in the plan. There is a maximum tax free withdrawal of $10,000 that can be used for the student loans, and then an additional $10,000 can be used for siblings. The one aspect of the 529 Plan that might lead people away is the fact that all the benefits are applied for educational purposes only. This means that when investing money into it, you are locked into using the money for educational purposes to receive all the valuable benefits. This may become a conflict if a child decides to not go to school, or if they receive their tuition through scholarships. 

For more information on 529 Plans visit SchwabMoneyWise.com or DaveRamsey.com.

Educational Savings Accounts

ESA accounts are another common form of college saving. This account can also be referenced as a Coverdell account. This account is similar to the 529 Plan but has a few differences. An Educational Savings Account has tax advantages, similar to a 529 Plan and is often used for education. There are a few restrictions and guidelines when using an ESA account. One of them is a maximum income cap on the eligibility to open one. Couples have to have a collective gross income of $220,000 or less to open an ESA. Another restriction is a maximum cap of $2,000 that can be deposited into the account annually until the child turns 18 years old. All of the money in the account must be liquidated by the time the child/student  turns 30 years old. The money can be rolled over into another ESA account, which is a way to get around this restriction. This would come into use if there is another child that will need educational payments. Another difference that this account has from a 529 Plan is the fact that there is no $10,000 cap on withdrawing tax free. 

More information about Educational Savings Accounts and how they compare to a 529 plan can be found at SchwabMoneyWise.com.

Uniform Transfer/Gift to Minors Act

The UTMA or UGMA account is the least common of the three accounts listed. This account isn’t restricted to educational use only. This means that if college is paid off in another way, your child doesn’t go to college, or another reason, that the money can then benefit another expense. The is a custodial account, meaning a guardian is the primary owner of the account, and the child/student is the beneficiary. UTMA accounts are transferred into the beneficiary’s ownership when they turn 21 years old, and the same goes for a UGMA account when the child turns 18 years old. Similar to the other accounts mentioned, this college saving method also has tax-advantages. The money that is transferred into this account is technically under the child’s ownership when it is put in, which means that when the money is taxed, it is at the tax rate of the child which is lower than that the guardians would be. This account is attractive to those who don’t want to feel locked into only using the money to pay for education. 

For a more in depth look at UTMA and UGMA accounts go to thebalance.com.

Savings Accounts

A savings account is always an additional option. This account doesn’t have the highest return and won’t be tax free, but it is always a safe and easy account to set up at any bank. Money can be deposited or withdrawn at any time, and you aren’t locked into only using the savings for college. This account of a very flexible, low risk alternative.

There are many different tactics and options when it comes to saving money for college. It is important to find the perfect fit for you and your family, which could even mean using a variety of plans. The 529 Plan, Educational Savings Accounts, Uniform Transfer/Gifts to Minors Act, and savings accounts are all great options to consider. Saving for college is an essential process that will help both you and your child in the future.