529 Vs Education IRA – Which is the One for You?
Children grow up so fast and before you know it, they are poised to get into college. Will you be ready? The National Center for Education Statistics notes that for the 2007–08 academic year – the most recent year for the available statistical information, the cost of undergraduate tuition, room, and board is about $11,578 (up 30 percent over a decade) at public institutions and $29,915 (up 23 percent over a decade) at private institutions. This is a lot of money.
The only question really is which plan to choose. Let’s compare the 529 vs Education IRA. These are the only two real choices when it comes to saving money for college because these are the plans that provide for big tax breaks.
529 education savings plans are tax free on all counts.
The contributions, account growth and withdrawals, so long as they are used for tuition fees, are tax free. The 529 plan is great way to save on taxes while creating a future for your child. As a side note, the name of the plan is derived from Section 529 of the Internal Revenue Code which is the section that was created in 1996 to implement this kind of education savings plan. There are two types of 529 Plan – a Savings Plan where your contributions are invested in mutual funds or something similar and a Prepaid Plan where you pre-pay all or part of the costs of an in-state public college education. These funds can be converted for use at private and out-of-state colleges. There is also an Independent 529 Plan which allows you to prepay for a private college.
The Education IRA is quite similar but there are two differences and these can be counted as advantages or disadvantages, depending on your point of view. One difference is that an Education IRA allows you to choose where to invest thus not limiting the investments to mutual-fund accounts. The other difference is that Education IRA savings can also be used for education at private and religious elementary and secondary schools. The 529 can only be used at an approved institution of higher education.