One of the best ways to increase the affordability of your child’s education is to take advantage of federal tax breaks aimed at families saving and paying for college. Here are a couple of common ways to save for your kids’ college education:

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.

529 Plan

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.

From Maui County Federal Credit Union.