Print this articleRelated Searches:With the rising cost of education, parents will need a larger piggybank.Parents with children born in 2010 will be facing four-year college average projected tuition costs of $95,000 for in-state public universities and nearly $341,000 for private colleges by the year 2028, predicts the education funding website Savingforcollege.com. These staggering sums will require the combined resources of federal, state and private tuition assistance programs as well as an earlier commitment to educational savings by parents.
Coverdell Education Savings Accounts (ESA)
It's easy to max out an ESA because you can deposit only $2,000 per child per year to age 18. When a contributor's modified adjustable income exceeds $95,000 for single filers or $190,000 for joint filers, the contribution limit reduces proportionately over the next $15,000 and $30,000 for single and joint filers, respectively. Contributions to ESAs are made after-tax but withdrawals made for qualifying, primary and secondary (K-12), under-graduate and graduate expenses are tax-free, provided you didn't also receive a tax credit or deduction for the same educational expenses from another source, such as a Lifetime Learning Credit or a personal education expense deduction. Over- funding an ESA will incur a 6 percent penalty on the excess contribution unless it is withdrawn by the April 15 tax filing deadline.
529 Plans
Parents who have maxed out their Education Savings Accounts can still make after-tax contributions to education savings plans authorized under Section 529 of the Internal Revenue Code and offered by every state as a savings plan or as a prepaid tuition program. Unlike ESAs, no maximum annual contribution cap applies. Nor do income restrictions, and participants are allowed to invest in any state plan regardless of residency. Also, contributors have more control over 529 money than ESA funds which must be turned over to a beneficiary by age 30. As with ESAs, 529 Plans may be purchased through banks, brokerage houses, insurance and mutual fund companies, and withdrawals for qualified education expenses are tax-free.
Roth IRAs
Some college savers who max out their ESAs use part of their Roth IRA retirement savings to supplement their children's college saving plans. In contrast to ESA funding, all IRA after-tax deposits must originate from earned income. For 2011, single tax filers with modified adjusted gross incomes up to $107,000 can contribute the maximum of $5,000 and joint filers earning up to $169,000 can each contribute $5,000. Contribution amounts phase out completely above $122,000 and $179,000 for single and joint filers, respectively. After five years from the first of the year in which the Roth IRA was established, accumulated earnings can be withdrawn tax-free after age 59 1/2. Principal can be withdrawn at any time without penalty and used for any purpose including education expenses.
Non-Deductable Traditional IRA
For folks whose incomes exceed the limitations for ESA and Roth IRA participation, stashing extra college savings money in a non-deductible IRA may give the families of college-bound students the additional resources they need to augment their 529 Plan. High earners may contribute each year $5,000 plus another $1,000 if they age 50 or older. Investment gains are taxed at withdrawal but money taken out before age 59 1/2 will escape the 10 percent early withdrawal penalty if the funds are used to pay higher education expenses. Parents should always be cautious about sacrificing their own retirement money to fund junior's education.
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