Planning for college can be overwhelming, but it is never too early to start saving. There are a variety of investment vehicles available so you can find one that will best fit your family’s needs.
The most common plan is the 529 Plan, of which there are two types – 529 Savings Plans and 529 Prepaid Plans. Both of these have tax deferred earnings and tax free withdrawals if the money is utilized towards qualified education expenses. If your child decides not to attend college, the plans can be transferred to another family member or you may choose to take the withdrawals and put the money towards something that is not a qualified education expense. If you choose the second option, the money will be subject to taxes alongside a 10% penalty.
The 529 Savings Plan acts as an investment account, and works similar to a retirement plan. Investments are sensitive to the market and returns are not guaranteed. The Savings Plan can be used at any institution that is eligible for Federal Student Aid regardless of the state where you or the beneficiary reside.
The 529 Prepaid Plan covers tuition and fees, locking in current prices. With the rapidly rising rates of college costs this can be a great deal; however, the beneficiary will generally be limited to public in-state options. If your child does decide to go private or out of state, you can still use the money in the Prepaid Plan, but be prepared to pay the difference in price out of pocket. The 529 Prepaid Plan can be combined with a 529 Savings Plan to help cover additional qualified education expenses, since tuition and fees typically only make up about 50% of annual college expenses, even at public in-state schools.
Another type of college savings vehicle is the Education Savings Account (also known as a Coverdell Account). This type of account acts similar to your traditional IRA. This method is slightly more restricted, including income, age, and contribution limitations. Contributions must end when the child reaches age 18 and all withdrawals must be made before they turn 30. Only $2,000 worth of contributions may be made each year. The earnings grow tax deferred and withdrawals are tax free when used for qualified education expenses, similar to the 529 plans.
Custodial accounts are another option for college savings. These accounts must be made for a minor. There are no contribution limits and $1,050 of earnings are exempt from federal taxes. Custodial accounts are considered assets of the student, which are weighed more heavily in financial aid calculations, so be aware this method of savings may negatively impact financial aid eligibility.
If you got a late start on saving for college, there are some ways to boost your savings. Consider opening a student funded Roth IRA. Contributions are withdrawn tax free, and you can leave the earnings to grow tax free for your child’s retirement. The maximum contribution that can be made each year is the lesser of $5,500 or the child’s total earnings for the year.
Another way to help build your savings is through UPromise. UPromise is a program funded through Sallie Mae that is free to join and can earn you cash back for college through online shopping, participating restaurants, travel, groceries, and more. Earnings can go towards a college savings plan or help pay down student loan debt. You can earn interest by opening up a college savings plan account, which can be combined with a 529 plan. UPromise also provides college planning resources that can be helpful.
Saving for a child’s college education is a very important decision to make. The plans described above are just a few of the most common ones. To find out more about each of these plans and other options for saving for college, a good place to start is the website www.savingforcollege.com. Another great resource for a comparative chart is located on the FINRA website. You should also discuss your savings options and how much you could/should save with your financial advisor.