It’s March 15th today, which aside from being the Ides of March, also marks the one-month countdown until tax deadine. Which means, you also have just one month left to make your 2009 contributions to your child’s tax-deferred college savings vehicles.
No idea what I’m talking about? Let me step things back for a moment.
Saving for college is essential, unless you have a really high salary with relatively low monthly expenses, and plan to just cash flow the whole thing. Assuming you don’t have $10,000 – $50,0000 a year (or more!) that you can pull form your annual budget, saving for college is essential.
There are lots of ways you save for college, from stashing dollars under your mattress (not my recommended method) to squirreling it away in a low-interest CD (again, not my first choice) to depositing it into a specific savings vehicle that offers tax benefits to the holder.
Given how close we are to tax time, I’m thinking that saving some of your money that would otherwise be destined for Uncle Sam probably sounds like a good idea! So, for a full rundown on all the tax preferred college savings vehicles out there, check out our College Savings section, where we talk about everything from 529s and ESA to UGMAs and UTMAs (oh my!).
The two most popular college savings vehicles are the 529 College Savings Plan (I’m not talking about the prepaid plans here — those are another kettle of fish entirely!) and the Educational Savings Account (ESA). Here’s a look at some of the tax features that make these accounts so popular:
1. They are tax-deferred.
Both 529 College Savings Plans and ESAs are tax-deferred, meaning, you put money into the account from your after-tax dollars, but the account grow tax free and the deductions are tax free, too — as long as you use the money for educational-related expense. The 529s have to be used for higher education only and have tighter regulations on what type of expenses qualify. The ESA can be used for any educational expense K-12 or higher education. Need to pay a tuition bill for your 8th grader or by your high schooler a new laptop for school? Hello ESA!
2. You may be entitled to deductions on your state income tax.
Some states offer you deductions from your income tax bill just for contributing to your state’s 529 Plan. A handful of states — including Arizona, Kansas, Maine and Pennsylvania — will even give you this sweet bonus for any plan you contribute to, whether or not it’s from your home state! (Here is a complete list of deduction limits by state.) ESA plans do not offer this benefit.
3. There is an April 15th deadline for previous year contributions.
Back at the top of this post, I mentioned that you have until the 15th of April to make your contributions. The ESA limits you to $2,000 per year per beneficiary. If you have four kids, you can do $2K for each of them. The trick, by the way, is that the beneficiary is limited to $2K per year, so if Grandma and Grandpa are putting in $1,500, you can only contribute an additional $500. There is no limit on the 529 Plan (well, that’s not entirely accurate, as some plans have a lifetime limit of $100,000, but most go up to $500k. So let’s say, practically speaking, there is no annual limit on the 529).
Whichever (or both) college savings vehicle you go with, however, the one limit you do need to know about is the contribution deadline. For contributions for the previous calendar year, you have until the next year’s tax deadline. So you have until April 15th to make contributions for ’09. Why does this matter? Let’s say you had a $3K windfall in January and you want to put it toward your child’s college education savings. Well, you can’t put all of into one year — at least not for the ESA. So, what you can do is put $2K toward your 2009 contribution (assuming you haven’t already maxed out) and another $1K toward the 2010 contribution.
For more on the tax benefits and other plus of 529 Plans and ESAs, check out my comparison between the two most popular college savings vehicles.
Are you currently investing in a college savings vehicle? Which one did you chose and why? Leave us a comment and tell us what you think about saving for college!