PDF Filling the Piggybank: College Savings Options

The following chart describes savings options that may be used to plan financially for college. Use it to compare the features, advantages, and disadvantages of the various options, and to select the savings method that best meets your needs.

Savings Option

Traditional Savings Accounts

Description

An account in a financial institution to keep funds for various planned and unplanned expenses

Annual Limits Unlimited

Advantages

? Convenient ? Protected by Federal

Deposit Insurance Corporation (FDIC) insurance

Disadvantages

? Low rates of return

? College planning services not available

? Interest earned may be taxable

FAFSA

? Value reported as part of cash, savings and checking accounts

Savings Bonds

Traditional Individual Retirement Arrangements (IRAs)

Moderately priced federal securities

$25,000 ($10,000 in Series EE, $10,000 in electronic Series I, and $5,000 paper Series I)

Retirement account not sponsored by an employer

$5,500 < age 50 $6,500 age 50

? Reliable, low-risk

? Low rates of

? Value reported

option backed by the return

as part of net

federal government ? Long maturation

? May be used for a

period

worth of investments

variety of expenses ? Lose some interest

earnings if

redeemed in less

than 5 years

? Low annual

contribution limit

? Contributions within annual limits are tax deductible

? Distributions made before age 59 and a half which are used to pay qualified higher education expenses do not incur additional tax penalty

? Low annual

? Value of

contribution limit

account not

? Designed to be

reported

used as retirement ? Annual

income

contributions

? Impact eligibility for financial aid

reported as untaxed income

Roth IRAs

Retirement account not sponsored by an employer

$5,500 < age 501 $6,500 age 50

? Distributions before ? Contributions not ? Value of

age 59 and a half not tax deductible

account not

taxable if used to pay ? Low annual

for qualified higher

contribution limit

education expenses ? Designed to be

? Earnings not taxed if

used as retirement

withdrawn after age

income

59 and a half

reported

1 Ability to contribute affected by modified adjusted gross income (AGI)

NASFAA is the largest postsecondary education association with institutional membership in Washington, D.C., and the only national association with a primary focus on student aid legislation, regulatory analysis, and training for financial aid administrators in all sectors of post-secondary education. No other national association serves the needs of the financial aid community better or more effectively.

1 Ability to contribute affected by modified adjusted gross income (AGI)

Savings Option

Section 529 Prepaid Tuition Plans

Description

Annual Limits

Advantages

Disadvantages

FAFSA

Purchase of

None.

? Federal and state tax ? Not offered by

? Value reported

tuition credits or Contributions from benefits

every state

as part of

certificates for a single contributor ? Can "lock in" the cost ? Some plans are no

beneficiary

to beneficiary that

of tuition

longer accepting

investments (always the

exceed annual gift maximum, $15,000,

?

States and/or colleges typically

new accounts ? Plans may increase

are subject to

bear investment risk the cost of tuition

taxation.

? Some plans have a

credits or

form of state backing certificates for

asset of the parent if parental information is required)

? Can typically apply towards private or

future purchases ? Contributions not

out-of-state colleges deductible on

federal tax return

Section 529

An investment None.

? Federal and state tax

Education Savings account

Contributions from benefits

Plans

designed to pay a single contributor ? Investment options

higher education expenses

to beneficiary that exceed annual gift maximum, $15,000,

?

High maximum plan value

are subject to

? Educational

taxation.

programming

resources

? Can use towards

eligible trade and

technical schools

? Contributions not deductible on federal tax return

? Participant bears investment risk (this could also be an advantage depending on investment performance

? Value reported as part of investments (always the asset of the parent if parental information is required)

Coverdell Educational Savings Accounts (ESAs)

Savings accounts $2,000 per

designed to

beneficiary2

encourage

saving for

education

2 Annual contribution amount affected by modified AGI

? May be used for K-12 ? Contributions not ? Value reported

and post-secondary

tax deductible

as part of net

education expenses ? Low annual

? Distributions not

contribution limit

worth of investments

taxed if use for

? Distributed funds

qualified educational that exceed

expenses

qualified

? May transfer account educational

over to another

expenses are

family member

taxable

? Funds must be

distributed when

beneficiary

reaches age 30,

unless special

needs beneficiary

? Funds distributed

at age 30 are

subject to an

additional 10% tax

Copyright ? 2012-2019 by National Association of Student Financial Aid Administrators (NASFAA). All rights reserved.

NASFAA has prepared this document for use only by personnel, licensees, and members. The information contained herein is protected by copyright. No part of this document may be reproduced, translated, or transmitted in any form or by any means, electronically or mechanically, without prior written permission from NASFAA.

NASFAA SHALL NOT BE LIABLE FOR TECHNICAL OR EDITORIAL ERRORS OR OMISSIONS CONTAINED HEREIN; NOR FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES RESULTING FROM THE FURNISHING, PERFORMANCE, OR USE OF THIS MATERIAL.

This publication contains material related to the federal student aid programs under Title IV of the Higher Education Act. While we believe that the information contained herein is accurate and factual, this publication has not been reviewed or approved by the U.S. Department of Education or the Department of the Interior.

NASFAA reserves the right to revise this document and/or change product features or specifications without advance notice.

July 2019

2 Annual contribution amount affected by modified AGI

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download