Millions of U.S. students will be heading to college this fall. Whether your children are two or 12, they will be registering for classes and purchasing those freshmen dorm room essentials before you know it. With that in mind, saving for college should be on the top of every parent’s checklist.
While it’s important to start a college savings fund as soon as possible, note that it’s never too late to start. Similarly, saving the entire amount may seem daunting, so keep in mind that you don’t have to fund the full tuition. Many families save only a portion of the projected costs, using it as a ‘down payment’ on the tuition bill, similar to a down payment on a house.
Below are a few options to consider as you start or continue your college planning:
The 411 on the 529 Plan. The 529 plan is an education savings plan operated by a state or educational institution and is designed to help families set aside funds for future college costs. Under a special rule, up to $70,000 ($140,000 for married couples) can be contributed to a 529 plan at one time, making it a popular planning tool.
Your contributions grow tax deferred and the earnings are tax-free at the federal level if the money is used for qualified college expenses. If, however, your child does not attend college and you withdraw the funds, earnings will be taxed and a 10 percent penalty will be imposed. The good news is, 529 rules allow you to change the beneficiary once per year. So, if “child A” doesn’t use the funds, you can utilize them for “child B” or another qualifying member of the family.
Covering the Coverdell Education Savings Account (ESA). A Coverdell ESA is a tax-advantaged savings vehicle that enables you to contribute up to $2,000 per year, for each designated beneficiary. The Coverdell ESA tax benefits are similar to a 529 Plan, but the ESA allows you to use the money for K-12 qualified expenses in addition to college. Though you have complete control over the investments in the account, Coverdell ESAs are not revocable. Distributions from the account are always paid to the beneficiary and cannot be paid back to you. Coverdell ESAs have numerous limitations and nuances, so be sure to do your homework before jumping in headfirst.
UTMA/UGMA Custodial Accounts. A custodial account, also known as Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA), is a way for your child to hold assets in his/her name with you acting as custodian until they reach a designated age, typically 18 or 21. All contributions are irrevocable and earnings and capital gains generated by investments in the account are taxed to the child each year. Assets in the account can be used for college but they don’t have to be. Often times, parents or grandparents will fund a custodian account to give the child flexibility when they turn of age. On the other hand, some are reluctant to use these accounts because they are concerned the child might use the funds in an irresponsible manner.
Boosting College Savings. We are all well aware of the rising costs of education. One way to help boost your savings is to consider participating in a program like Upromise, a rewards program that directly benefits the college savings vehicle of your choice. Participants are able to contribute cash back earnings into their account, earn interest and combine earnings with an eligible 529 plan for faster growth potential.
Regardless of which path you choose, keep in mind that some college savings accounts may impact financial aid eligibility. Additionally, account fees vary from plan to plan, and if too high, can hinder your savings goals. I recommend consulting with your trusted advisor(s) to choose a plan that is right for you.
Taylor Schulte, CFP® is founder and CEO of Define Financial, responsible for company’s vision, strategy and execution. Schulte is passionate about helping clients create successful financial plans, accumulate wealth and plan for retirement. While he works with a range of individuals and small businesses, Schulte has a keen understanding of young professionals’ financial needs and infuses industry-leading technology into his practice to optimize client results and experience.