College Planning: Education IRA or 529 Plan?

With the costs of college rising at a rate that is twice the rate of inflation, college planning has become more critical than any time in the past. Whether you plan to have your kids go to a community college, and then transfer to a four-year college or go directly to a four-year college it's going to be costly. Thankfully, there have been resent plans set up, so that you can save for the rising costs associated with college. Both the Education IRA (Coverdell ESA) and the 529 plans offer good ways to save for college.

The Education IRA, or Coverdell ESA, is one of the simplest ways to save and find a child's education. The Education IRA acts similarly to a basic IRA, in that you are limited in the amount of contribution you can make within a given year. Also, there are income restrictions, so if you make over a certain amount of money each year (currently $110,000) you are not eligible for Education IRA contributions. The Coverdell Education IRA is a great tool when saving for college over time. Obviously, contributing $2000 a year for four years isn't going to fund your child's complete education. This is why starting in Education IRA as early as possible makes all the difference in the world. We know that from financial planning basics that time is the most important factor in achieving our financial goals, investment return is secondary. When it comes to selecting investments within an Education IRA, you can choose just about any investment style or asset allocation, these IRA's offer little investment restriction.

Much like the Education IRA, the 529 plan is designed to help with the rising tuition costs associated with a college education. When you set up a 529 plan, its ownership is set up in your name, and not that of the beneficiary. This can be particularly attractive, and that the beneficiary can be changed in the future. You may have a child that does not end up attending college, for what ever reason. This puts the control in your hands, where it belongs. When it comes to setting up a 529 plan, you will have to check with your specific state, as these are state driven plans. You are, however, required to set up a 529 plan with your specific state. You can search the different states to find the most attractive 529 plan. It is important to note, however, that some states offer tax incentives for contributions. Unfortunately, not all states offer this at this time. Regardless of state, withdrawals for qualified education are completely free from tax. This isn't just limited to fancy qualified colleges, many trade schools qualify as well.

The 529 plan offers a few more bells and whistles that the Education IRA does not. Most notably, the amount of money you can contribute to a 529 plan is quite a bit greater than that of Coverdell individual retirement accounts. This can be rather important if you start saving for college late. Current limits are set at
Adversely, you'll have less investment selection within a 529 plan, though, most 529 plans offer an adequate selection of mutual funds to choose from.

Choosing between the Education IRA and the 529 plan may seem complicated. If you're starting early and don't.can't afford to put large amounts away, the Education IRA may be the logical choice, as the 529 plan typically comes with a higher cost to operate. If you're getting a late start and would like to contribute larger amounts the 529 plan may be a good fit. The important thing to remember here, is to do something, indecision will just cost you the most valuable key to saving-- time. When selecting a 529 plan. It is always advisable to go over it with your financial advisor, he/she should be up to date on state specific information and 529 plan choices.