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Planning for College – Weekly Investments

Planning for college is something parents tend to wait until it’s too late to do. Having your child go to college only to come out with $50,000 in debt isn’t ideal for your child or yourself.  The key is to plan early, educate yourself with the associated tax implications, and refrain from making common mistakes. There are many college savings accounts and tools that can save parents thousands of dollars. The following are the main forms of beneficial college investment vehicles.

529 – Planning for College

A 529 for educational expenses is similar to a 401k or IRA for retirement. A 529 is a tax-free alternative to saving for your child’s college expenses.  So long as the account is used to pay for qualified tuition expenses such as tuition, books, fees, supplies, or room and board, no taxes will be paid on earnings. This tax benefit can make a substantial difference to your child’s future. The 529 belongs to the parent not the child, which is beneficial in a couple different ways. First, since it belongs to the parent this will have a much smaller effect on the child’s financial aid when filling out his or her FASFA. Secondly, the parent can largely control how the money is spent as the parent can change beneficiaries at any time. If the money is spent on unqualified expenses such as funding your child’s spring break trip to Cancun, the money spent will be subject to income tax along with a 10% penalty on any earnings. 529s are highly recommended college investment vehicles which allow parents to start planning for college.

Prepaid College Tuition Plans – Planning for College

Prepaid College Tuition Plans are an alternative to a 529. These are for parents that are sure that their child is going to attend an in-state public university. Tuition prices are growing at a faster rate than ever seen before. This is a good plan to lock in rates at current prices.

The major downfall is if your child decides not to attend that college, you have lost much of this investment’s benefit. For instance, you prepay $10,000 for one year of college and the tuition has risen to $25,000. If your child decides not to attend that public university, you will not get back the full $25,000. The amount reimbursed will likely be closer to $12,000-$14,000. On the other hand, if this $10,000 had sat in a tax-deferred 529 for 15 years accumulating interest at a rate of 8%, this amount would be $31,722.

Coverdell Education Savings Account – Planning for College

This savings account is much like a 529 except for its ability to be used to cover all qualified education expenses which unlike 529 includes K-12  educational expenses. Coverdell ESAs do have limitations; limits include a $2,000 contribution limitation per child per year and these contribution limits phase out for singles earning more than $95,000 and couples earning more than $190,000.

Roth IRA – Planning for College

A Roth IRA has similar tax advantages to the previous accounts and can also be used as a college savings vehicle. Usually there is a penalty enforced if one withdraws from this account prior to age 59 ½. However, after 5 years a Roth IRA allows the holder to withdraw funds both tax and penalty free for qualifying educational purposes. In this way, you still control your money and if your child does not attend college you can still use the funds for your retirement without any penalties.

UGMA and UTMA Custodial Accounts – Planning for College

UGA and UTMA Custodial Accounts are in very few instances your best alternatives but are worth noting. These custodial accounts have some tax advantages but not as many as a 529 plan. UGMA and UTMA Custodial Accounts are where financial gifts are made to a minor which is held in a custodial account until the child reaches adulthood. Unlike a 529, this account is considered the child’s asset which may have a couple negative impacts. First, since it is the child’s asset it will have a greater adverse impact on their financial aid when filling out his or her FASFA. Secondly, the parent has no control over how the money is spent because it is solely owned by the child.

Quick Tip – Planning for College

Quick Tip: To maximize financial aid, if the child’s parents are divorced, have the child move in with the lower income earner of the two a year prior to high school graduation. In this way, the child will likely get more financial aid as household income is one of the most if not the most imperative looked at factor in the financial application process.

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