What’s the Best Tool for Education Savings?
When you choose to save for your child’s education, you’re making an important investment in their future. Your decision shows that you view education as an essential tool your child will need to obtain future success. And now that you’re ready to begin saving, it’s time to choose the best savings vehicle for you and your family.
529’s are a popular choice
In 1996 Congress created Section 529 of the internal revenue code to provide tax relief for families who wished to save for future education. As a result, states began to create 529 plans to provide families with a way to invest money for education without incurring taxes on gains made from their investment. In 2002 South Carolina launched the Future Scholar 529 College Savings Plan to provide South Carolina families with a tax-advantaged way to save for education.
In the years since the legislation was passed, millions of students have used 529 plans to pay for their education, and there are currently over 17 million Americans saving with a 529 plan.
Many experts consider a 529 the best plan for education savings, but you may be asking yourself, “How does a 529 savings plan compare?” That question may best be answered by examining just how saving for education with a 529 plan compares to the other options out there.
Is a 529 account better than the Uniform Gift to Minors Act (UGMA)/Uniform Transfer to Minors Act (UTMA) to save for education?
If maintaining control of the assets and gaining tax advantages are important to you, then a 529 account may be a better option for your education savings.
With a 529 account, the account owner maintains control of the account after the beneficiary turns 18. Under UGMA/UTMA, custodians only manage these accounts until the minor becomes 18 (or 21 in some states). Maintaining control of the account allows parents and grandparents to ensure the funds are used for the intended educational purpose.
With a Future Scholar 529, South Carolina families can deduct 100% of their contributions on their SC state income tax return. In addition, 529 account owners do not pay taxes on the earnings when they withdraw funds for qualified education expenses. Unlike the tax-free earnings of a 529 plan, UGMA/UTMA accounts’ earnings and gains are taxed to the minor. When comparing tax benefits, Future Scholar 529 is the clear choice.
Is a 529 account better than a Coverdell Educational Savings Account (ESA) to save for education?
If you would like an educational savings tool without income or contribution limits, then a 529 account may be a better option for you.
Future Scholar 529 has no annual contribution limit and no gross income limit. With Future Scholar, anyone can open an account and save up to $575,000 per beneficiary, regardless of income level. In contrast, Coverdell ESA’s have income limits for participation. To enroll, single taxpayer families must have a modified adjusted gross income (MAGI) of $110,000 or below; married taxpayers must have a MAGI of $220,000 or below to participate; and your maximum annual contribution limit is $2,000 or less, depending on your income.
In addition, South Carolina taxpayers who save with a Future Scholar 529 may also deduct their contributions from their state income tax returns. Coverdell ESA does not offer this benefit, and recent expansion of qualifying expenses from 529 plans for K-12 has closed the gap considerably for elementary and secondary education.
Is a 529 better than a ROTH IRA to save for education?
If you would like the freedom and flexibility to withdraw funds for qualified educational expenses at any age without penalty, then a 529 account may be a better option for you.
Because 529 accounts are designed for education savings, funds are never taxed when withdrawn to pay for qualified education expenses. Though Roth IRA accounts are funded with after-tax dollars, funds are taxable upon withdrawal - unless the account owner is over age 59 ½ and has held the account at least five years.
Another important consideration when comparing these two savings vehicles is how much you want to save. With Future Scholar 529, there is no limit on annual contributions. This allows for lump sum contributions much larger than the current Roth IRA annual limit of $7,500 per year for individuals under 50 years old. In contrast, contributions to a Future Scholar account can be made until the aggregate value of all accounts held for the same beneficiary reaches $575,000.
And what’s more, unused 529 assets can be rolled into a Roth IRA account for the beneficiary, subject to specific requirements. Clearly, Future Scholar takes the lead for education savings.
Is a 529 account better than using a traditional savings account to save for education?
If you want the option to invest your money in a variety of different ways and pay no taxes on the earnings, a 529 account could be the better choice for you.
When you open a 529 account, you decide how your funds are invested. 529 accounts offer a range of conservative to aggressive investment options. Many 529 account owners choose an investment strategy that automatically adjusts according to the age of the beneficiary or when they’ll need to use the funds. And with a 529, your funds have the potential for even more growth due to compounding interest. In contrast, the funds in your savings account are cash savings only with very limited, if any growth potential. With a Future Scholar 529 account, you decide which investment strategy aligns with your risk tolerance and your savings goal.
In addition, the interest earned on funds in your savings account is considered taxable income. However, earnings in a 529 account are not taxed as long as they are used for qualified educational expenses. When comparing the potential for tax free growth, Future Scholar wins.
Is a 529 account better than a Trump Account to save for education?
A 529 plan is generally better if you're saving for education because qualified withdrawals are tax-free and contribution limits are much higher. A Trump Account, on the other hand, is designed for long-term wealth building and as a retirement plan.
If you want the flexibility to use your savings before the beneficiary turns 18, and you want the maximum tax advantage for saving for education, a 529 is the obvious choice.
Many families face education-related expenses long before college, including K–12 private school tuition, standardized testing fees, and tutoring costs. A 529 plan can be used to pay for qualified education expenses at every stage of a student's academic journey, from kindergarten through graduate school and certain professional certification programs. Investment earnings from a 529 account are not taxed when withdrawn to pay for qualified education expenses, and South Carolina residents can also deduct 100% of their contributions to a Future Scholar 529 account on their state income tax return.
In contrast, because Trump Accounts are designed as a long-term saving savings vehicle, access to funds is generally restricted until the child reaches age 18. Any investment earnings or gains on funds withdrawn after age 18, including those used for educational expenses, are generally subject to income tax.
The Clear Choice
For most families, a 529 account is the best option for saving for education. However, it’s important to note that you don’t have to pick just one tool to save for your child’s future. In fact, many of the savings’ vehicles referenced in this article can be used in complementary ways to achieve a variety of savings goals.
Regardless of the savings vehicle you choose you can be proud you’ve made the important decision to give your child the gift of education. If you are ready to open a 529 account, South Carolina’s Future Scholar 529 Plan is designed to help you achieve your educational savings goals. For more information and to enroll, visit www.FutureScholar.com
