College Savings: Frequently Asked Questions
Linear Financial Services, Inc. provides the following knowledge section for informational purposes only. No representation regarding investor suitability and no solicitation to any investor is intended. Not all products are available through Linear. For example Linear does not offer a Coverdell Education Savings Account (ESA), a 529 Plan or municipal bonds.
Who can participate in 529 plans and Coverdell ESAs?
Anyone can open an account and anyone can be a beneficiary -- parents, grandparents, aunts, uncles, even good friends. You may even open an account for your own higher education.
What is the best account type to use?
The 529 Savings Plan and the Coverdell ESA are both tax-advantaged, and can be used for education without penalty. Other potential investments include the UGMA/UTMA custodial account and parental investment accounts.
Why can’t I just tap into home equity when the time comes?
The reason is if you start investing in a 529 plan or Coverdell ESA now, your money compounds, and you could end up with substantially more, without needing to tap into your home asset. Say you make an initial contribution of $1,500, and add just $250 a month with an average annual return of 8%. After 17 years, your account balance would be worth over $110,000. Do you really want to take out a $110,000 home equity loan in the future?
How can I select the right 529 plan if I don’t know if my son or daughter is going to a four-year college?
In the vast majority of 529 plans, withdrawals from the account can be used at any educational facility where federal student aid is available – private schools, public universities, community colleges, graduate schools, and trade schools around the nation.
Am I stuck with my state’s 529 plan?
If you don’t like your state’s plan, shop around. Plans are open to residents and nonresidents alike. You can also start out in your state and then roll your savings into another state’s plan without penalty.
What happens if I decide to start investing early and then my child opts not to go to a college?
You can change the beneficiary to that child’s brother or sister or someone else in your family tree. Your account beneficiary can be changed as many times as you like, and can be passed from generation to generation. Otherwise, federal law imposes a 10% penalty on earnings for non-qualified distributions.
I’m a grandparent and I’m worried about unplanned financial needs I may have down the road. Can I get my money back from a 529 plan or Coverdell ESA?
Yes. Just about every 529 plan or Coverdell ESA allows you to take the funds back for yourself at any time and for any reason. The 529 account value is then removed from your taxable estate.
What higher education expenses are covered by a 529 savings plan?
You can use your savings to pay for qualified expenses such as tuition, fees, certain room and board expenses, books and supplies necessary for attendance. Other withdrawals may be subject to federal and state taxes, as well as penalties.
How do Coverdell ESA compare to 529 plans?
Like 529 plans, ESAs are a tax-deferred – potentially tax-free – way to invest for college expenses. But unlike 529 plans, ESA withdrawals are tax-free through the year 2010 when used for qualifying K-12 expenses in addition to college.
One major difference is that only $2,000 a year can be contributed to ESAs for any child. If you – and a grandparent – make contributions in the same year, the annual limit may be exceeded.
Can I transfer my existing Coverdell ESA into a 529 plan?
Yes. But remember, the Coverdell ESA is owned by your child, so it may not be proper to transfer the funds into a 529 account owned by you. Ask your Linear Finance advisor for assistance.
We have two children who are close in age. Should we just set up one account?
It makes more sense to establish a separate 529 or Coverdell ESA account for each child. The reason: a single 529 account can only have one individual named as beneficiary. To use the account for a child who is not the current beneficiary later on, you would need to establish a new account for that child, and then transfer funds (tax-free) from the main 529 account to the new 529 account.
Are there minimum contribution requirements?
There are no set annual contribution or income limits. You can invest as often or seldom as you like, although it’s obviously to your benefit to invest on a regular basis.