Georgia Finance

Jan 31 2018

College savings plans: Picking the right one

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College savings plans which is right for you?

It feels like a big decision, but don’t worry it’s easy to find the account that has everything your family needs.

Start by looking at 529 plans

For most people, a 529 savings account offers a mix of benefits that will get you the closest to your goal.

With these accounts, you can save money on taxes both when you make your contributions and every year between now and move-in day. Put those savings toward college, and you’ll see how much of a difference they make.

If you’re interested in learning about other types of college savings accounts, the table below makes it easy to compare and decide.

How it works

  • Tax-deferred earnings: You don’t pay taxes on the money you earn until you take it out.
  • Tax-free withdrawals: If you use the money for college expenses (which is the whole idea!), you won’t pay any taxes on the money you earn ever.
  • Tax deductions: Many states let you deduct your contributions (up to a certain amount) from state income tax, and some even offer a tax credit in the amount of your contribution.

Put these tax benefits together, and it will make a big difference. If you put $25 a week into an account that offers a tax deduction, you’ll save $65 on taxes that year if your state tax rate is 5%. If you put that $65 back into your college savings and if the account is also state tax-deferred you could accumulate an additional $3,500 for college after 18 years, versus an account with no tax benefits.

This hypothetical illustration assumes an average annual return of 6%. It doesn’t reflect any particular investment nor does it account for inflation or federal tax considerations. It also assumes that all withdrawals from the tax-deferred account are considered qualified. Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes.

The assumed rate of return isn’t guaranteed, and the results would be different given a different rate of return. When making an investment decision, you should consider your own timeline and income tax bracket, as the illustration may not reflect your situation.

How it works

  • Tax-deferred earnings: You don’t pay taxes on the money you earn until you take it out.
  • Tax-free withdrawals: With some accounts, if you use the money for college, you won’t pay any taxes on your earnings ever. It can make a big difference.

For example, imagine you and your friend both open college savings accounts at the same time and contribute $25 a week for 18 years. You choose an account with federal tax benefits, while he opens an account with no tax breaks. When taxes are due on his earnings, he takes money out of the account to pay them.

If you both earn 6% a year on your investments, when it’s time for college, you’ll have about $3,800 more in your account!

This hypothetical illustration doesn’t reflect any particular investment nor does it account for inflation or any state tax considerations. It assumes your friend pays 25% in federal income taxes on investment gains. (Note that investment gains may be taxed at a more favorable rate.) It also assumes that all withdrawals from the tax-deferred account are considered qualified. Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The assumed rate of return isn’t guaranteed, and the results would be different given a different rate of return. When making an investment decision, you should consider your own timeline and income tax bracket, as the illustration may not reflect your situation.

No, these accounts are meant to be used for education. However, you can use the money for elementary, secondary, and postsecondary education, or change the beneficiary if you don’t end up needing the money. Or you can withdraw your money for any reason and pay taxes and a 10% penalty on the earnings (but not on the contributions).

Account control

Yes, for the most part, you control the account. However, once the beneficiary reaches age 30, if there’s still money in the account, you’ll have to give the money to him or her (and pay taxes and penalties) or roll it over to another beneficiary.


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