Plan ahead for College Saving Flexibility

 If you thought saving enough money for retirement was a daunting challenge, then add saving for college expenses and it creates a financial challenge that many families face.

It seems that many people simply delay saving for one goal to cover the other and that's where planning can be important.

When considering a plan to fund college expenses you might explore a few of the options available such as, a Coverdell Education Plan or a state sponsored 529 College Savings plan. In both of these accounts the account balance can be withdrawn Tax-Free if used for covered educational expenses.

Both of these college savings plans work similar to the Roth Ira where contributions are non-deductible and the account balance can grow tax free. Withdrawals from both types of accounts are also tax free for qualified higher education expenses, although with the Coverdell Plan covered expenses can also include those from kindergarten thru college. Both plans can be transferred to another beneficiary without penalties or fees.

Income limits for to set up accounts:

• 529 College Savings Plan: There is no income limit.
• Coverdell Educational Plan: To qualify for the max $2,000 contribution, your AGI needs to be less than $95,000 for single filers and $190,000 for married couples.

There are age limitations for contributions and withdrawals for the Coverdell Plan- the beneficiary needs be under 18 to receive contributions into the account and assets must use assets before age 30. There is no age limitation for contributions or withdrawals from the 529 Plan.

Depending on your residency and the state plan chosen there can be a state tax credit for contributions to the 529 plan while the Coverdell plan doesn't have this benefit. 529 Plans and Coverdell Plans are viewed the same for financial aid purposes.

The Coverdell Educational Plan does have several advantages over the 529 plan if you qualify with the income limits and only contribute no more than $2000 per year. There's the ability to use the funds for K-12 expenses & make unlimited changes to asset allocation, and ESAs may have better investment options, depending on the state in which you open your 529 College Savings Plan.

The good news is that you can have both plans for your children.... Both of these college savings plans have fine print and conditions, so I recommend checking with your financial advisor before opening an account and making contributions.