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With the rising cost of higher education, it’s critical that parents save money now for their children’s future college expense. The cost of a four year degree exceeds $50,000 at most colleges. An Ivy League school can cost that much per year. Often it is difficult for parents to save money – they feel it takes everything they have just to raise their children. It comes down to priorities and choices. Decisions made today could determine if your children will attend college or not.

There are several savings plans that allow you to save money for college. The features and benefits of each are different. From the following five choices, there should be one that meets the educational needs of your family.

Education IRA/Coverdell Educational Savings Account.

In 2001, Congress passed a bill allowing parents to contribute up to $2,000 per year per child to an education IRA. The contribution amount is based on family income. The account is flexible in its investment options and it provides a tax shelter for capital gains. Withdrawals are penalty-free as long as they are for qualified educational expenses. If one child in the family does not use all of the funds in this account, the balance can be transferred to another child in the family.

UGMA/UTMA Account.

This is an account opened by an adult on behalf of a child. The child’s social security number is used and the adult is the custodian of the account. For children below age 14, the contribution amount is $11,000/year. The first $700/year is tax free, the second $700/year is taxed at the child’s rate, and the remainder at the contributor’s rate. The account is flexible in that it doesn’t have to be used solely for education, however, there are drawbacks. Once the funds are transferred to the beneficiary the custodian loses control. Typically this happens when the child becomes an adult. There are no tax shelter advantages and having the funds counts as income when applying for financial aid.

Roth IRA (For Minors)

Roth IRA’s are discussed in more detail in another article. What’s unique about these is a child can open their own IRA, if they work and earn their own money.

Education Savings Account (ESA)

An ESA account is designed to save money for education expenses. One of the best features of this plan is that anyone meeting income requirements can contribute to the account. In fact, the contributor doesn’t have to earn any money at all but if their income exceeds a certain limit they are not eligible to contribute. In 2002, the definition of qualified education expense changed to include elementary and secondary schools. Contributions are not deductible, but the earnings do accumulate on a tax-free basis. The annual contribution limit is $2,000 per beneficiary.

Education 529 Plan

Education 529 Plans are offered by all 50 states in the U.S. Anyone can open one of these accounts, contribute to it, and be listed as a beneficiary. The donor, rather than the beneficiary, is in control of the plan. Generally, it doesn’t have a negative effect upon financial aid. Gains accumulate tax-exempt, and distributions for educational purposes are untaxed. The biggest drawback to these accounts is the limited investment options.

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