“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.

Pros:

  • 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.

Cons:

  • 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).

Savings Accounts

Two-thirds of Americans who are putting aside cash for college use dedicated savings accounts.

Pros:

  • No restrictions on how you use the proceeds
  • Will not lose value
  • Federally insured

Cons:

  • 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)

Roth IRAs

You can use your Roth as a combination education/retirement savings account.

Pros:

  • Vast range of investment options
  • Tax-free growth
  • Funds not used for education stay invested for retirement

Cons:

  • 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.

Pros:

  • Qualified withdrawals are tax-free
  • Wide range of investment options

Cons:

  • Very low annual contribution limits
  • Complicated beneficiary changes

Share Certificate Accounts, CDs and Savings Bonds

These are conservative, “set it and forget it” options.

Pros:

  • Funds are insured
  • Fixed interest rates, not subject to market volatility

Cons:

  • 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

Trusts

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.

Pros:

  • Total investment flexibility
  • The donor realizes some tax advantages
  • Funds are “hands off” until adulthood

Cons:

  • 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.