4 Smart Ways to Save for College

//4 Smart Ways to Save for College

4 Smart Ways to Save for College

More jobs today require a college education than in the past. We want our kids to have options and a
college degree can increase those possibilities. Following are four smart ways to help your student
obtain that education without the burden of leverage.

529 College Savings Plan – Named after Section 529 of the Internal Revenue Code, these education
savings plans were created in 1996 to help families set aside funds for future college costs. They are
typically offered by states (most offer them) as a savings plan, but some colleges and universities also
offer them as prepaid plans. You are not limited to the plans offered in your state; you can enroll in any
plan that is available. You can be a California resident, invest in a Vermont plan and send your student
to a college in North Carolina. 37% of parents own a 529 plan and 24% are using prepaid state plans.

UGMA/UTMA account – First derived from the Uniform Gift to Minors Act in 1956, later changed to
Transfers rather than Gifts, a UTMA permits minors to own property by entering into legally binding
contracts. This allows parents to transfer assets directly to their children, which is then managed by a
custodian, usually the parent, who is appointed by the donor. Every state has adopted some form of the
UGMA, but the laws are not perfectly matched across jurisdictions. Changes to the tax codes since these
accounts were created have diminished the original benefits and the drawbacks can be substantial.
Nevertheless, 22% of parents are using a UGMA/UTMA.

Coverdell Education Savings Account – Passed into law as part of the Taxpayer Relief Act of 1997, the
Coverdell ESA has some features in common with 529 plans, such as tax-free growth and tax-free
distributions to cover education expenses. But they also differ in ways such as offering greater
investment control, allowing lower contribution caps and limiting who can contribute based on income.
Coverdell accounts are often able to fill funding gaps left unaddressed by other tax-advantaged savings
vehicles. 24% of parents are using a Coverdell Education Savings Account.

Roth IRA – These types of savings accounts were also established by the Taxpayer Relief Act of 1997.
Roth IRA’s are designed for retirement savings, but have come to be viewed as a viable tool for college
or educational savings as well because of the flexibility of their features. Despite being able to use the
Roth IRA to fund college, doing so should be a last resort for at least two reasons. One, Roth IRA’s are
designed for retirement savings, not school savings. Diverting retirement dollars towards other
purposes harms your own plans for self-sufficiency when you are done working. Two, limits exist both
on who can contribute (based on income levels) and on the amount. As a result, capacity for Roth
contributions are in short supply and should be guarded as part of an overall retirement plan rather than
diverting them on an education funding plan.

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2020-09-18T10:45:56-05:00 September 18th, 2020|Financial Planning|0 Comments