Beyond the financial advantages of tax savings and tuition prepayment, there are more reasons to begin investing a college savings plan as soon as possible. Higher education and college education cost are rising rapidly
A college education is a very valuable in today’s work environment, and likely will be even more so in the future.
According to the US Department of Education, over the past decade, tuition costs have risen 51% before your public schools, 36% for four-year private schools, and 26% for two-year public schools.
A college savings plan can help you meet or exceed these rates by deferring taxes on your investments allowing you to pay tomorrow’s tuition at today’s rates.
Traditionally if you leave your money in a savings account, which generally earn 1 to 3% per year the rate at which your money grows long keep up with the increasing cost of higher education.
Having a college degree greatly increases your earning power, the salary you can expect to make each year upon graduation. Full-time workers with college degrees earn an average of $19,900 per year more than those with high school diplomas only.
Obviously this adds up to hundreds of thousands of dollars in earnings over a lifetime.
As discussed parents and grandparents normally set up college savings plans for their children or grandchildren. In normal circumstances, the IRS imposes a gift tax on any monetary gift one person gives to another in excess of $12,000 in a given tax year.
However if the gift is a contribution to a college savings plan, the IRS allows the individual to give up to five years worth of gifts tax-free and one year which means that an individual can get $60,000 worth of college savings at once the beneficiary without incurring a tax liability.
There are four main types of plans use to invest money for higher education related expenses.
Collectively though all these plans are often referred to as college savings plans, they’re actually various different types of plants.
Encompassed within the 529 college savings plan are, 529 savings plans, prepaid tuition 529 plans, and private 529 plans.
Additionally Coverdell Education Savings Accounts are used as college savings plans. The difference between these plans is whether they allow landowners to invest money in tax-deferred accounts were buy tuition at favorable rates.
Plans also differ on the institutions that offer them, some plans are offered a state governments, whereas others are offered by commercial institutions, such as banks and financial services firms.
Many college savings plan owners choose one plan, however it is possible to use a combination of plans at the same time to accomplish your college savings goals.