Planning for college on an EMS salary: 5 options to save
Whether you’re looking to head back to school or investing in a family member’s future, there are several ways to financially prepare for the cost of college
By Lynzie Wolters and Crystal Kanada
Many people plan to save for college but may not be aware of their options to do so or know where to start. When college is a distant goal, it’s easy to put saving on the back burner but remember – time is both your biggest asset and greatest obstacle. The earlier you begin saving, the more manageable reaching your goal becomes.
There are several options available to EMS employees and their families when it comes to saving for college. Here are some of the most common choices to help you get started.
1. 529 plans. A 529 plan is a tax-advantaged savings plan specifically designed for education expenses. Contributions to a 529 plan grow tax-free, and withdrawals are also tax-free when used for qualified education expenses. Qualified expenses include costs associated with higher education such as tuition, room and board, books and supplies, as well as a portion of expenses for K-12 and student loan repayment. Beginning in 2024, a set amount of unused 529 money may be able to be rolled into a ROTH IRA. Each state has its own 529 plan, and some states offer additional tax benefits for residents who contribute to their state’s plan. When setting up a 529 plan, there are two types to consider: prepaid tuition plans and college savings plans.
2. Coverdell Education Savings Account (ESA). A Coverdell ESA is another taxadvantaged savings account that allows you to save for education expenses, including college and K-12 expenses. This type of account may be more flexible when used for K-12 education expenses compare to the 529. Contributions to a Coverdell ESA grow tax-free, and withdrawals are also tax-free when used for qualified education expenses. However, there are annual contribution limits and income restrictions. If the money is not used prior to the child’s 30th birthday, that account will be distributed, subject to tax and a 10% penalty.
3. UGMA/UTMA custodial accounts. Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) custodial accounts are investment accounts that allow you to save for a child’s education as well as other expenses for the child. Contributions to these accounts are considered irrevocable gifts to the child and reportable as the child’s asset. The funds can be used for any purpose benefiting the child at the discretion of the parent or guardian managing the account, including but not limited to college expenses. Once the child reaches the age of majority (usually 18 or 21, depending on the state), they gain control of the account and can use the funds as they wish.
4. Roth IRA. While a Roth IRA is primarily designed as a retirement savings account, it can also be used for education expenses. Contributions to a Roth IRA are made with after-tax dollars and grow tax-free. In a Roth IRA, you may choose to withdraw your contributions at any time, however earnings may be subject to taxes and/or penalties if drawn prior to 59 ½. If used for qualified education expenses you may avoid the penalty when drawing from your earnings by submitting proof to the IRS that the student is attending an eligible institution, however earnings will be subject to tax if the account holder is not 59 ½. You may use your Roth IRA to pay for you, your spouse, your children or your grandchildren’s qualified education expenses.
5. Traditional savings and investment accounts. Traditional savings and investment accounts may also be used to save for college expenses. While they do not offer the same tax advantages as the options mentioned above, they still allow you to save and grow your money over time.
It’s important to consider your specific financial situation, goals and preferences when choosing a college savings option. Consulting with a financial advisor may also help in assisting you to make the best decision for your needs.
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ABOUT THE AUTHORS
Lynzie Wolters ChFC® RICP® and Crystal Kanada are Registered Representatives offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, a Licensed Insurance Agency and a New York Life Company, (916) 781-7480, 2999 Douglas Blvd., Suite 350, Roseville, CA 95661. Lynzie Wolters is a Financial Adviser offering investment advisory services through Eagle Strategies LLC, a Registered Investment Adviser. Eagle Strategies LLC is a New York Life company. Lynzie Wolters & Crystal Kanada: CA Insurance License Number 0I20911 & 0H92673. Capital Edge Insurance and Financial Services, Inc., is independently owned and operated from Eagle Strategies LLC and its affiliates. Information provided by Capital Edge Insurance and Financial Services is for educational purposes only. Capital Edge Insurance and Financial Services as well as Eagle Strategies LLC and its affiliates do not provide tax, legal or accounting advice. Before taking any related planning actions, consult with your own professional counsel if needed.