Where to Save Your Child's College Fund
Depending on the type of account you use, you can score some good tax advantages on top of your savings.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
Now that I've convinced you to start saving for your kid's college education as soon as possible, your first question must be: Where?
You have a number of options, each with a unique set of advantages and disadvantages. Here are your best bets:
529 College Savings Plan
Pros
This state-sponsored account is available to anyone, regardless of income levels, and mostly come with high contribution limits, up to $300,000 a year. It allows your investments to grow tax-free. Withdrawals to pay for qualified educational expenses, such as college tuition, fees, room and board and textbooks are also tax-free. Plus, depending on which state plan you choose (you don't necessarily have to go with the plan from your own state of residence), you may get a state tax deduction or tax credit for your contributions.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Cons
Unqualified withdrawals are taxed and hit with a 10% penalty fee, so you are strongly encouraged to only use the funds for the beneficiary's college education. You can, however, easily change the beneficiary to another family member, such as a sibling.
Prepaid Tuition Plan
Pros
Also state-sponsored, this type of plan lets you buy tuition at a state college or university ahead of time, allowing you to lock in today's tuition rates. If your child decides they want to head elsewhere, the funds can be applied to out-of-state or private schools.
Cons
Only about a third of states offer these plans and restrict them to state residents. Even among those few choices, several plans are closed to new investors.
Coverdell Education Savings Account (ESA)
Pros
This type of account allows your money to grow tax-free, and withdrawals for qualified educational expenses are tax-free also. The definition of qualified expenses is broader than that of a 529 plan—it includes tuition for private elementary and high school, too.
Cons
You must have a modified adjusted gross income of less than $110,000 if you're single, and $220,000 if you're married, in order to contribute to a Coverdell. And your contributions are limited to $2,000 per year. Also, unqualified withdrawals are taxed and charged a 10% penalty—as is any money not used by the time the child turns 30.
UGMA/UTMA Custodial Accounts
Pros
These types of accounts allow you to save in your child's name, which can offer some tax savings, and the funds can be used for any reason. Anyone can contribute, regardless of income, and there are no contribution limits. Full-time students under the age of 24 pay no tax on the first $1,000 of investment earnings. For the next $1,000, they pay their own tax rate—presumably a lower rate than yours. Everything else is hit with your marginal tax rate.
Cons
Since the funds in these accounts are considered assets of your child, it will adversely affect how much financial aid he or she can qualify for. That's because a larger amount would be expected to go towards education costs than if the funds had been left in the parents' name.
Roth IRA
Pros
Though its specified purpose is as a retirement savings vehicle, funds in your Roth may be used to cover college costs. Contributions to a Roth can be withdrawn at any time for any reason, tax- and penalty-free. Earnings can also be withdrawn without incurring the 10% early withdrawal penalty, if you use them to pay for qualified educational costs. If you are under age 59½, however, you still have to pay taxes on such a withdrawal.
Cons
In order to contribute to a Roth, you must have a MAGI of less than $132,000 if you're a single filer, or $194,000 for married couples who file their taxes jointly. Your contribution limit is $5,500 in 2016. Also, let me point out again, this money is typically saved for the purpose of funding your retirement—and that should take priority over paying for your child's education. Do not sacrifice your retirement savings.
Which of these options would be best for you? Most people likely will find that a 529 is their optimal choice. But it really depends on your unique financial situation. You might even want to consider some combination of the aforementioned accounts.
You should consider many factors when making this decision. Some questions you might ask yourself include:
- What is your tax filing status and your annual gross income?
- How many children do you have, and how old are they?
- How old will you be when your eldest child starts going to college?
- How much do you plan to contribute to your kids’ college savings?
- How much control would you like to have over your investments?
- How likely is it your savings will be used to pay for college?
Answering these questions can help you narrow down the right account for you. Working with a financial adviser can help ensure that you pick the right type of account or combination of accounts to maximize your tax advantages, growth potential and the likeliness that you'll be able to achieve this important financial goal.
Scott Vance is a fee-only financial planner and enrolled agent serving the greater Raleigh, NC area. He recently retired from the Army and seeks to continue service through financial advising.
-
Ask the Tax Editor: Federal Income Tax DeductionsAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on federal income tax deductions
-
States With No-Fault Car Insurance Laws (and How No-Fault Car Insurance Works)A breakdown of the confusing rules around no-fault car insurance in every state where it exists.
-
Why Picking a Retirement Age Feels Impossible (and How to Finally Decide)Struggling with picking a date? Experts explain how to get out of your head and retire on your own terms.
-
Retiring Next Year? Now Is the Time to Start Designing What Your Retirement Will Look LikeThis is when you should be shifting your focus from growing your portfolio to designing an income and tax strategy that aligns your resources with your purpose.
-
I'm a Financial Planner: This Layered Approach for Your Retirement Money Can Help Lower Your StressTo be confident about retirement, consider building a safety net by dividing assets into distinct layers and establishing a regular review process. Here's how.
-
I'm a Financial Adviser: This Is Why I Became an Advocate for Fee-Only Financial AdviceCan financial advisers who earn commissions on product sales give clients the best advice? For one professional, changing track was the clear choice.
-
This Is How You Can Land a Job You'll Love"Work How You Are Wired" leads job seekers on a journey of self-discovery that could help them snag the job of their dreams.
-
4 Ways Washington Could Put Your Retirement at Risk (and How to Prepare)Legislative changes, such as shifting tax brackets or altering retirement account rules, could affect your nest egg, so it'd be prudent to prepare. Here's how.
-
2026's Tax Trifecta: The Rural OZ Bonus and Your Month-by-Month Execution CalendarReal estate investors can triple their tax step-up with rural opportunity zones this year. This month-by-month action plan will ensure you meet the deadlines.
-
Have You Aligned Your Tax Strategy With These 5 OBBBA Changes?Individuals and businesses should work closely with their financial advisers to refine tax strategies this season in light of these five OBBBA changes.
-
A Financial Plan Is a Living Document: Is Yours Still Breathing?If you've made a financial plan, congratulations, but have you reviewed it recently? Here are six reasons why your plan needs regular TLC.
