There are two types of tax-deferred college savings plans available to help you save for your child’s college education. 529 plans and Educations Savings Accounts (ESAs) have many advantages over custodial, general brokerage and savings accounts.

A 529 plan is a state-sponsored college investment account. You can choose from one of several pre-defined asset allocation portfolios and you can contribute up to $75,000 ($150,000 per couple) per beneficiary in a single year. There are, however, five-year gifting tax provisions that should be considered, if applicable. There is no age limit for beneficiaries, and there is a lifetime limit for each beneficiary (depending on the State).

An Education Savings Account is set up and managed by a parent or guardian for the benefit of a minor child. Investment choices are managed by a parent or guardian and there is a $2,000 per year, per beneficiary contribution limit, which is subject to adjusted gross income limitations. Contributions can be made until the beneficiary is 18 years old and the funds must be distributed to the beneficiary by age 30.

With both 529 plans and ESAs, withdrawals are free from Federal income taxes when used for qualified education expenses. Earnings are taxed as ordinary income and may be subject to a 10% Federal penalty (if used for nonqualified expenses). Both plan types are counted as assets of the parent or account owner in determining financial aid.

529 plans and ESAs have many advantages over custodial, general brokerage and savings accounts, including advantages related to taxes and financial aid eligibility. You should start saving as early as you can, invest regularly, and put aside as much as you can afford.  If you are interested in learning more about college savings plans, the advisors at YHB Investment Advisors, Inc. can help. Contact us at (860) 561-7050 or info@yhbia.com .

Resource: https://www.schwab.com/saving-for-college/college-savings-plans