College is F**king Expensive
Let’s all just stop and acknowledge this. College is expensive. The struggle is real. It’s not going anywhere. You likely want your kids to go to college. So.. solutions? Yes… solutions!
There are essentially 5 main ways to save for college (and save some money in the process):
- 529 Plans
- UTMA/UGMA Accounts
- Coverdell Savings Accounts
- Prepaid tuition plans
- Roth IRAs
Let’s do a quick dive into each one.
A 529 Plan is a vehicle you put money in that’s designated for college. There are a lot of 529 plans, which all come with their own annual fees and operating costs. Generally, 529s have tax advantages, such as earnings that aren’t subject to federal tax – and in some states, you get a tax deduction for contributing up to a certain amount each year. Almost every state has its own 529 plan, but you can put your money in any state’s 529, and you may find that there are some state plans you like better than your own – so make sure you do some research for signing up.
The best thing is that if the funds in a 529 plan are used for college expenses, you never pay taxes on them. Not the principal or the growth. The downside is if you don’t use the funds towards college expenses – you may have to pay a penalty to the IRS at the time of withdrawal. Plus, there are maximums – ranging from $200,000 to $400,000 depending on the state. But… you can always max out one state and open another 529 plan in a different state, so it’s not really an issue.
(www.savingforcollege.com has a lot of great information).
UTMA and UGMA Accounts
UTMA – Uniform Transfer to Minors Act
UGMA – Uniform Gift to Minors Act
These are custodial accounts that act as a trust for your child. In other words, if you have assets like bonds, stocks, annuities, or just cash that you’d like to reserve especially for your kids, you can put them in one of these accounts. The downside is that when it comes to financial aid, your college will consider this when deciding how much to give your child. So if you have a lot of money in one of these accounts, the school may not give you much. Of course, if you have a lot of money in these accounts – you probably don’t need financial aid. The difference between the two accounts is when your child gets access to the funds and they become the official account holder. There are no tax advantages to saving this way – unless you consider capital gains taxes as an “advantage”. OH! Your kid doesn’t have to spend the money in this on college. They can save it towards something else.. like a Lamborghini. Priorities are different for everyone – I’m not here to judge!
Coverdell Savings Accounts
This is another type of trust or custodial account that’s specifically for a child’s college education. The main downside is that you can’t put more than $2,000 a year into one or multiple ESAs. IF you open a Coverdell ESA for your child and your father does too, you put $1,000 in and he could contribute the same, but then you’re done. Of course, if you’re fighting to put away $200 a year, this may not bother you. Limitations like this are why 529s have become so popular.
Prepaid Tuition Plans
Basically you buy tuition credits at a college in your state at current tuition rates instead of waiting the 18 years of inflation and see what college will cost then. The downside is that your child may not want to go to the school you’ve chosen. You can get your money back, but the money you invested will likely not have grown as much.
You can open a Roth IRA in the name of your child once he or she begins earning income. While your kids will maintain control of the account, restrictions on Roth IRA withdrawals keep investors from taking earnings out penalty-free until age 59.5. However, there are exceptions to this rule that allow early withdrawals due to certain circumstances or for specific types of spending – including college expenses and purchasing a first home. This means that your child will be limited as to what they can spend the money on. Plus IRA assets don’t count towards financial aid. Bonus points all around!
I could talk about college savings forever, so PLEASE submit questions if you have them.