The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities. The price of higher education doesn't come cheap, which means it's a good idea to start saving while your kid is learning their ABCs — not while they're studying for their SATs. For most people, the choice of college savings vehicle is easy: plans offer some great incentives for saving.
But they also come with some complicated rules. A plan provides tax-free investment growth and withdrawals for qualified education expenses. Parents who start saving in a account when their children are young can take advantage of those tax savings, as well as compounded returns and — in some states — a tax deduction on contributions.
Because of those tax advantages, plans do have a few rules, including guidelines around what qualifies as an education expense. Most states offer at least one plan.
The beneficiary does not have control over the funds in the account, even when they reach the age of majority, which is between the ages of 18 and 21, depending on the state. Review recommended browsers. Select link to get a quote. Type a symbol or company name and press Enter. How Are We Different? Help When You Want It. Find a local Merrill Financial Solutions Advisor franchise bankofamerica.
Schedule an appointment. Ways to Manage Accounts. Investment Accounts. Life Planning. Market Overview. Research Overview. Education Resources. Education Overview. Help When You Need It. General Investing. College Planning Accounts. Small Business Accounts. Open an account. Open Menu bar. Ask Merrill. Why Merrill Edge. General Investing Online Brokerage Account. Life events. Life priorities. Investor education. Tools and calculators. You aren't restricted to investing in your own state's plan, but doing so may get you a tax break, so check out that plan first.
The earnings in a plan are exempt from federal and state income taxes, provided the money is used for qualified educational expenses. The money you contribute to a plan isn't tax-deductible for federal income tax purposes. However, more than 30 states provide tax deductions or credits of varying amounts for contributions to a plan.
In general, you'll need to invest in your home state's plan if you want a state tax deduction or credit. If you're willing to forgo a tax break, some states will allow you to invest in their plans as a nonresident.
The owner typically you may transfer to another plan once per year unless a beneficiary change is involved. You are not required to change plans to change beneficiaries. You may transfer the plan to another family member, defined as:. As with other kinds of investing, the earlier you get started, the better. With a savings plan, your money will have more time to grow and compound. With a prepaid tuition plan, you'll most likely be able to lock in a lower tuition rate, since many schools raise their prices every year.
If you have money left over in a plan—say the beneficiary gets a substantial scholarship or decides not to go to college at all—you'll have several options. One is to change the beneficiary on the account to another relative, as financial advisor Jay Murray describes in the box above. Another is to keep the current beneficiary in case they change their mind about attending college or later go on to graduate school.
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