“Oh, they grow up SO fast!”
New parents hear that a lot, and it’s absolutely true. And it’s a reminder that NOW is the time to start putting money aside for college. Here’s an overview of the college savings plan choices available to you:
529 Savings Plans
These popular, education-specific accounts invest in mutual funds or exchange-traded funds with the objective of higher returns.
- Annual contribution limits are higher than Roth IRAs.
- You pay no taxes on their growth in value.
- You can change the beneficiary with no penalty. So if your daughter wants to take a “gap year” after high school, you can designate the proceeds to a sibling—or even yourself—as long as it’s going toward qualified educational expenses.
- When held in the parents’ name, there is a minimal effect on financial aid awards.
- There are penalties if the funds are not used for educational expenses.
- Plans are subject to stock market volatility, so it’s important to reduce your risk profile as college gets closer (many 529s do this automatically).
Two-thirds of Americans who are putting aside cash for college use dedicated savings accounts.
- No restrictions on how you use the proceeds
- Will not lose value
- Federally insured
- Very low interest rates
- No tax advantages
- Easy access without penalties (as the saying goes, “life happens,” making it hard to put that money back)
You can use your Roth as a combination education/retirement savings account.
- Vast range of investment options
- Tax-free growth
- Funds not used for education stay invested for retirement
- Annual contribution limits are much lower than 529s
- Withdrawing funds for education can jeopardize your retirement savings
Coverdale Education Savings Accounts
ESAs can help fund education from kindergarten through graduate school.
- Qualified withdrawals are tax-free
- Wide range of investment options
- Very low annual contribution limits
- Complicated beneficiary changes
Share Certificate Accounts, CDs and Savings Bonds
These are conservative, “set it and forget it” options.
- Funds are insured
- Fixed interest rates, not subject to market volatility
- Very low returns
- No tax benefits
- Share Certificate Accounts or CDs have substantial penalties for early withdrawals
- Early redemption of savings bonds sacrifices their maximum value
A trust invests funds on a child’s behalf until he or she reaches a certain age (usually between 18 and 21), when the proceeds transfer to him or her.
- Total investment flexibility
- The donor realizes some tax advantages
- Funds are “hands off” until adulthood
- When funds transfer to beneficiary, financial aid eligibility can be negatively affected
- No restrictions on how beneficiary can spend the proceeds
- Cannot change beneficiary
Keep in mind, this is merely an overview, and a combination of these options may be best for your goals and circumstances. There’s a lot to learn and know—Pen Air’s Deposit Accounts Team will be happy to guide you through your college planning process.