College Saving Strategies
College Savings Strategies
(Just in case junior doesn’t get that scholarship you’re hoping for)
There are several different types of accounts that can be utilized to save for college expenses. There are a few things to consider when determining the best strategy and type of account: The child’s age, When will funding begin, The parent’s income and how much they want to save. I will cover these accounts and when it makes sense to use them.
529 College Savings Plan
These plans are administered by the state and are great for parents/grandparents who would like to start when the child is young or if they need to contribute larger amounts to catch up.
Advantages
• Grows tax deferred and withdrawals are tax free for qualified education expenses
• State of Alabama offers a state tax deduction for the contributions up to $5,000 for single filer and $10,000 for joint
• Grandma and Grandpa can contribute
• Virtually no limit on amount put into each account
• The owner (usually a parent) controls the assets and can roll the assets into another beneficiaries’ account. This could come in handy if you have multiple kids planning to attend college
• Easy to administer
Disadvantages
• Will incur a 10% IRS penalty plus taxes if withdrawals are for purposes other than education expenses, so overfunding could be an issue
• Operating expenses of the individual investments tend to be a little on the high side
• You are limited on the investment options offered by the plan
• There is a limit to how many times you can change investment options. (typically, two times per year)
• Gift taxes could be an issue for large contributions
Roth IRA
Roth IRAs are typically thought of as retirement accounts, however, they can also be a good
way to put money back for college.
Advantages
• Assets grow tax deferred
• Contributions can be taken out without a penalty. For example: if you have contributed
$50,000 over the years and the account has grown to $100,000, you can withdraw
$50,000 without a penalty even before you reach the age of 59 ½
• Investment flexibility, you can buy ETFs and individual stocks and bonds
• Assets are not counted for financial aid purposes
• Use the assets for your retirement if junior gets the scholarship
Disadvantages
• No state income tax deduction
• There’s a limit on the amount you can contribute each year. For 2018 it’s $5,500,
increasing to $6,000 for 2019 with an additional catch-up of $1,000 if your over 50.
• Withdrawals in excess of basis do not receive tax-free treatment.
Brokerage Account
Advantages
• No limit on contributions
• Investment flexibility, you can buy ETFs and individual stocks and bonds
• Assets can be used for anything
Disadvantages
• Not tax deferred
• No state tax deduction
Bottom Line
If you have the financial resources, I like the strategy of having more than one college funding
vehicle, with the 529 plan as the main college savings account. Plan on having at least enough
assets in a 529 plan to pay tuition and fees (currently around $6,750/ semester for an in-state
student at The University of Alabama).
(Just in case junior doesn’t get that scholarship you’re hoping for)
There are several different types of accounts that can be utilized to save for college expenses. There are a few things to consider when determining the best strategy and type of account: The child’s age, When will funding begin, The parent’s income and how much they want to save. I will cover these accounts and when it makes sense to use them.
529 College Savings Plan
These plans are administered by the state and are great for parents/grandparents who would like to start when the child is young or if they need to contribute larger amounts to catch up.
Advantages
• Grows tax deferred and withdrawals are tax free for qualified education expenses
• State of Alabama offers a state tax deduction for the contributions up to $5,000 for single filer and $10,000 for joint
• Grandma and Grandpa can contribute
• Virtually no limit on amount put into each account
• The owner (usually a parent) controls the assets and can roll the assets into another beneficiaries’ account. This could come in handy if you have multiple kids planning to attend college
• Easy to administer
Disadvantages
• Will incur a 10% IRS penalty plus taxes if withdrawals are for purposes other than education expenses, so overfunding could be an issue
• Operating expenses of the individual investments tend to be a little on the high side
• You are limited on the investment options offered by the plan
• There is a limit to how many times you can change investment options. (typically, two times per year)
• Gift taxes could be an issue for large contributions
Roth IRA
Roth IRAs are typically thought of as retirement accounts, however, they can also be a good
way to put money back for college.
Advantages
• Assets grow tax deferred
• Contributions can be taken out without a penalty. For example: if you have contributed
$50,000 over the years and the account has grown to $100,000, you can withdraw
$50,000 without a penalty even before you reach the age of 59 ½
• Investment flexibility, you can buy ETFs and individual stocks and bonds
• Assets are not counted for financial aid purposes
• Use the assets for your retirement if junior gets the scholarship
Disadvantages
• No state income tax deduction
• There’s a limit on the amount you can contribute each year. For 2018 it’s $5,500,
increasing to $6,000 for 2019 with an additional catch-up of $1,000 if your over 50.
• Withdrawals in excess of basis do not receive tax-free treatment.
Brokerage Account
Advantages
• No limit on contributions
• Investment flexibility, you can buy ETFs and individual stocks and bonds
• Assets can be used for anything
Disadvantages
• Not tax deferred
• No state tax deduction
Bottom Line
If you have the financial resources, I like the strategy of having more than one college funding
vehicle, with the 529 plan as the main college savings account. Plan on having at least enough
assets in a 529 plan to pay tuition and fees (currently around $6,750/ semester for an in-state
student at The University of Alabama).
Tom