September is National College Savings Month. Are your kids saving for college?
If your child is planning to attend college, it is a good idea to have him or her start saving as early as possible. Indeed, it can help for you to start saving on their behalf. The cost of tuition continues to rise, and your children will need a significant amount of money if they are to reduce their need for debt going forward.
Coverdell and 529 Plans
You can increase the way your money works for you with help from Coverdell and 529 plans. These are savings plans primarily concerned with college, and they come with some specific benefits associated with these plans. One of the biggest advantages is that the money in one of these plans grows tax-free, and withdrawals are not subject to federal taxes — as long as the money is used for qualified education expenses.
Because Coverdell and 529 plans include investments, it is possible for your money to grow faster than it would in even a high yield savings account or CDs — provided you have the money in long enough to do well. Many people choose to invest in index funds or mutual funds for a Coverdell or 529 plan.
Things to Remember
There are different requirements and limits that go with Coverdell and 529 plans. Limits to the amount that can be entered into the accounts might apply, especially in terms of the Coverdell. Additionally, some 529 plans are limited as to where the money can be used. Many state plans require that you use the money from the account only at specific state schools. Before you sign up for a state 529 plan, make sure you understand where the money can be used. Some states will let you use the money at any school.
You should also remember that there is no guarantee that Coverdell and 529 plans will increase in value. Because they are tied to investments, there is the risk of slow growth, or even loss, during tougher times. It is a good idea to consider this. The longer you have the account, the more likely you are to come out ahead.