The average tuition bill has more than doubled over the past 20 years, making it more important than ever to start saving for college early on. In 2021-22, the average cost of tuition and fees for a four-year degree ranged from $10,740 to $38,070 a year, according to the College Board. Unsurprisingly, private colleges are the most expensive, while public two-year programs are the most affordable.
Fortunately, financial institutions like KEMBA Financial Credit Union offer a number of savings vehicles to help you grow your college fund. Learn more about the available options and how to find which is right for you.
Coverdell Education Savings Accounts
While contributions aren’t tax-deductible, interest and dividends grow tax-free, and you won’t have to pay taxes on withdrawals used for qualifying educational expenses, such as tuition, room, board and books. Coverdell ESAs can also be used to pay tuition at private and parochial elementary schools and high schools, as well as colleges.
ESAs were designed for low- and moderate-income families, so there are financial guidelines around who can open them. Total contributions are limited to $2,000 per student per year, or $36,000 total. That means there’s a good chance you’ll need another savings vehicle to cover rising tuition costs.
529 Plans
529 plans are offered by individual state governments and administered by brokerage firms such as Vanguard and Fidelity, but you’re under no obligation to send your child to college in that particular state. It pays to seek out plans that charge the lowest brokerage fees. Some states, including Ohio, also give tax breaks to residents who invest in their home state’s 529 plan. Currently Ohioan’s can deduct up to $4K per year, per beneficiary.
UMGA and UMTA
One drawback is that a portion of the investment income may be taxed each year as “unearned income.” On the plus side, if a child opts not to go to college, or the money is needed sooner for other reasons (such as medical expenses), money can be used for non-educational purposes with no tax penalties.
The child gains control of the money upon turning 18 or 21, depending on his or her home state. In contrast, Coverdell accounts and 529 plans remain in the parent’s control throughout the college years.
Individual Retirement Accounts
Although you can avoid the early withdrawal penalty by using IRA money to cover tuition, this can have major income tax implications. It’s better from a tax perspective to withdraw money from a Roth IRA than a traditional IRA. It’s also smart to consult a tax advisor or accountant.
To learn about college savings strategies and how to choose the best option for you, contact KEMBA Financial Credit Union or visit one of our Ohio branches. Our representatives will gladly help you work out a strategy that best fits your financial resources and future needs.