Education Savings Account (ESA)
An education savings account helps you pay for education expenses from kindergarten through college. Account earnings can grow tax-deferred, and withdrawals are tax-free when used for eligible expenses. ESAs allow you to invest up to $2,000 (after tax) per year, per child.
Benefits of an ESA include a likely much higher rate of return than you’d get in a regular savings account and when you withdraw the money to pay for education expenses you won’t have to pay taxes. An ESA has flexibility and can be used for K-12 tuition, a vocational school or school supplies. Plus, if your child doesn’t end up needing it, you can transfer the money to a sibling for their education.
If you can afford to save more than $2,000 a year for your child’s college education or if you don’t meet the income limits for an ESA, then a 529 Plan could be a better savings option with no annual contribution limits, other than gift tax considerations. Like an ESA, 529 Plan earnings are tax-deferred, distributions are tax-free if used to pay for qualified expenses and savings can be used for other education expenses such as K-12 tuition, vocational school or required textbooks.
Be sure to choose a plan that best fits your family’s unique situation as not all 529 Plans are the same. Things to consider include:
- Research your state’s 529 plans and tax benefits to help you decide whether an in-state plan is your best bet, or if you should expand your search nationwide.
- Determine how you will use the 529 account so you can choose features that match your needs.
- Find investment profiles that match your goals by comparing them to your own risk tolerance and growth targets to choose a smart fit.
- Compare the performance of 529 accounts to find ones that result in higher returns and have a solid track record of delivering consistent growth.
- Watch out for fees and make sure the costs won’t pull too much from your earnings.
- If there are other siblings, you may want the option to move the funds from one family member to another.
Whether your child is a teenager or toddler, it’s never too early to start thinking about savings for their college education.