Educational Savings Plan
This is a tax-advantaged investment vehicle designed to encourage saving for future higher education expenses for a designated beneficiary.
Why an Education Savings Plan is Important
Post-secondary costs continue to increase. By utilizing an Education Savings Plan you can ensure your children or grandchildren can continue their education without incurring a heavy debt load.
What We Can Do for You
RESP (Registered Education Savings Plan) – These 529 plans allow you to grow tax-deferred compound interest. There are advantages and disadvantages of these investments:
- Advantages
- Taxes – 529 plan investments grow on a tax-deferred basis and distributions are tax-free when used to pay for qualified education expenses. Many states also offer a state income tax deduction or credit for 529 plan contributions.
- Low Maintenance – You can set an automatic investment plan linked to a bank account or payroll deduction plan.
- High Contribution Limits – 529 Plans have no annual contribution limit. These plans are considered gifts to the designated beneficiary for tax purposes. In 2022 it is up to $16,500 per donor, per beneficiary.
- Favorable Financial Aid Treatment – When a dependent student’s parent or dependent student owns a 529 plan it is reported as a parental asset and has a minimal effect on financial aid eligibility. Distributions from parent and student owned accounts are not counted as income on the FAFSA (Free Application for Federal Student Aid)
- Flexibility – These plans offer the same flexibility for all families, regardless of their household income or the amount they contribute. You can invest in almost any 529 plan no matter where you live or where your child will attend college.
- Disadvantages
- Penalty for Non-Qualified Withdrawals – Non-qualified distributions are subject to income tax and a 10% penalty on the earnings portion of the distribution. There are exceptions to the penalty if the beneficiary gets a scholarship, attends a US Military Academy, dies, or becomes disabled.
- State Income Tax Recapture – If the account owner does a rollover into another states plan, any state income tax deductions and credits previously claimed may be subject to recapture and the earnings portion of the rollover may be added back to state taxable income.
- Limited Investment Choices – You can select from a menu of investment options. These are aimed to achieve a targeted level of risk and age-based portfolios that automatically shift asset allocation as the beneficiary gets closer to college.