Posted on March 15, 2010.
Investing in the education of children? I want to invest in the education of my child. Would it be smarter to invest in a 529 plan or savings bonds? Is there a significant difference between the two? Are there other options out there that I look forward to a decision? I have information regarding a plan for 529, but nobody knows exactly how it works in Michigan and if there are tax advantages by keeping Michigan vs. through another state?
I think it would be good to diversify. Invest in some savings bonds for education and one of the following as the main investment:
1. Coverdell Education Savings Account (ESA) - a trust or custodial account created or organized in the United States in order to pay tuition fees of eligible designated beneficiary of the account. This benefit applies not only to spending on higher education, but also for primary spending and secondary education. What is the tax advantage of the Coverdell ESA? Contributions to Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed.
2. Aka 529 Plan qualified tuition programs (QTP) - What is the tax benefit of a QTP? No tax is due on a distribution from a QTP unless the amount distributed exceeds the beneficiary's adjusted qualified education expenses. Even if a QTP is used to finance the education of a student, the student or student's parents still may be entitled to claim the credit of hope or lifetime learning credit on their federal income tax return.
529 plans are generally preferable to savings bonds. In particular, you stand to qualify for a tax deduction for state income up to $ 10,000 for a joint statement and up to $ 5,000 for a single return if you invest in the Michigan 529 plan. See the following link from the website of Michigan Education Savings Program, which has a side by side comparison of education savings options.
The only advantage I see in savings bonds is the absolute safety of capital. This may seem like a big plus when the stock market crashes as it has been recently, but to get the security you have to accept extremely low yields, which will most likely not to follow the rising cost of education. Realistically, you should go with the 529 plan, especially for young children where you have many years to recover from a fall.
Hi Angela,
My wife is pregnant and after having done tons of research I have just set up a plan of 529. It is also very good to cross states lines to get a good plan. The New York is great.
Here is a very good article that really helped me: http://www.fiscalsanity.com/family/secur ...
529 plans are much better. They have tax incentives for donors and you should have much more of it over time.
