5 Ways to Save for College

Choices. Choices. Choices. It’s always nice to have choices when it comes to making important decisions in your life. Sometimes though, having a multitude of choices can be overwhelming. Working with clients when it comes to planning for their kids college education is a perfect example. The are many ways that you can save for your kids’ college education. For somebody that feels overwhelmed, here’s a quick look at the five basic ways that you can save to pay that looming tuition bill down the road.

529 College Savings Plan

The 529 College Savings Plan is one of the more popular ways to save for college. For me, it’s the way that I save for my son’s college. If you happen to be a resident of my state, you can read a post I wrote on the Illinois 529 College Savings Plan Options. (Yes, the “S” is silent). If not, double check your own state to see what the options are.

With a 529 plan you can save for anyone – your child or grandchild, a niece or nephew, a friend or even yourself.

  • You can contribute up to $13,000 ($26,000 for married couples) annually without gift-tax consequences. Under a special election, you can invest up to $65,000 ($130,000 for married couples) at one time by accelerating five years’ worth of investments.
  • You can contribute until your account value reaches $350,000. (I don’t think I’ll have a problem with this)
  • Earnings can grow tax-free. (Just like the Roth IRA)
  • Withdrawals for qualified higher education expenses are free from federal tax. Withdrawals for non-qualified expenses are subject to ordinary federal income tax plus a 10% penalty on the earnings.
  • There are no income limits. You can contribute no matter how much you earn.
  • You maintain control of the assets.

Editors Note: I actually opened my 529 Plan with Ohio CollegeAdvantage. For more information, see 529 Plans: The Smart Way to Save for College.

Coverdell Education Savings Account

Coverdell Education savings accounts can be used to pay for your child’s qualified expenses from kindergarten through high school, as well as for higher education. I see less and less people using Coverdell ESA’s as college savings options, but one does turn up every now and then.

  • You can contribute up to $2,000 a year.
  • Earnings can grow tax-free.
  • Withdrawals for qualified expenses are free from federal tax.
  • There are income restrictions. If your income exceeds certain limits, you will not be eligible to contribute.
  • You can change investment options as often as you wish.

UGMA/UTMA Custodial Accounts

UGMA/UTMA custodial accounts let you take advantage of your child’s lower tax rate while saving for your child’s education. Personally, I’m not the biggest fan of these because of the control issue. I know how I was at 18, and don’t expect my kids to be any more mature than I and being able to manage a large sum money. I’ll be happy if they prove me wrong.

  • There are no contribution limits.
  • Beware of the Kiddie Tax. For children under age 19 and full-time students under age 24 whose earned income is less than one-half of their support, the first $950 of earnings is tax-free. Earnings between $950 and $1,900 are taxed at the child’s rate; earnings above $1,900 are taxed at the parents’ rate.
  • There are no income limits. You can contribute no matter how much you earn.
  • The beneficiary gains control of the assets at age of majority, which is age 18 or 21 in most states.

Your Own Investment Account

Saving for your child’s education through your own investment account allows you maximum control of the assets.

  • There are no contribution limits.
  • Earnings are taxed to the owner.
  • There are no income limits. You can contribute no matter how much you earn.
  • You maintain control of the assets and decide when withdrawals will be made.

Your Roth IRA

I know what you are thinking. “A Roth IRA is for retirement not college savings”. Yes, that’s true. I’ve encountered a few times where people are extremely gun-ho about saving for the kids’ college, and put their own retirement on the back burner. By utilizing the Roth IRA, you ensure that you are saving for retirement and if your kid does goes to school you can pull out your contributions with no problem and just pay the tax on any gains.

  • Can only contribute $5000 per year ($6000 if over the age of 50).
  • There are income limits over better known as Roth IRA phaseout limits.
  • You are in control of the assets and decide when to withdraw the money.

I hope that gets you in the right direction in saving for college.

Editor’s Note: I really like this idea of using the Roth IRA. See my guide for opening a Roth IRA.

Jeff is an Illinois Certified Financial Planner and co-founder of Alliance Investment Planning Group. He is also the author of Good Financial Cents, a financial planning and investment blog. You can also learn more about Jeff at his website Jeff Rose Financial.

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Last Edited: March 13, 2013 @ 12:15 am
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