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Saving for college is one of those things all parents know they should be doing, but getting started can be daunting and intimidating. While 529 plans are the first type of investment that comes to mind when you mention saving for higher education costs, there are actually several options available to parents who want to begin preparing for the road to college. We had the privilege of connecting with CFP® Zaneilia Harris, President and Financial Advisor at Harris & Harris Wealth Management. Harris, who authored Finance ‘n Stilettos: Money Matters for the Well-Heeled Woman, gave us the run-down on what those options are so that we can begin making smarter financial choices in regard to our children and their future education.
Roth IRA
A Roth IRA is an individual retirement account that can be used for both retirement income and college expenses.
“Some parents may consider using their Roth IRA for college savings. The maximum amount per year that can be put into a ROTH is $6,000. Any contributions and earnings grow tax-free,” explained Harris. “The original contributions have already been taxed and can be withdrawn for any reason. The downside of using a ROTH is that parents are pulling money from their retirement to pay for college expenses.”
529 Plan
There are two types of 529 plans, which are tax-advantaged college savings plans sponsored by a state or state agency.
“There is the 529 College Savings Account. The funds deposited in these accounts can be invested in pre-selected mutual funds. The money saved in this account grows tax-free and any distribution that’s used for qualified higher education expenses is tax-free,” explained Harris. “The maximum amount that can be contributed is up to $350,000. Funds can not only pay for collegiate expenses; but under certain guidelines, for K-12 expenses as well. An important point to remember is this account is always owned and controlled by the parent or account owner.”
Parents interested in the 529 programs can also take the prepaid route. “The 529 Prepaid Plan is a state-offered plan that allows a parent to buy tuition credits, generally at an in-state public college, with today’s dollars, which means the parent is locking-in the cost of college now no matter the price of future tuition.”
Coverdell Educational Savings Account
The Coverdell Educational Savings Account is a tax-deferred trust account offered by the United States Government to help families fund the education of their children.
“This account allows a parent to save a maximum of $2,000 per year,” said Harris. “The parent can purchase any type of investment for this account. The growth within the account and distributions for educational expenses are both tax-free, but control of the account is lost once the child reaches the age of majority, generally age 18.”
UGMA/UTMA (Uniform Gift to Minors Act and Uniform Transfer to Minors Act) Account
“With the UGMA/UTMA accounts, it is a custodial account that is used to gift assets to minors. The funds placed in these accounts can be used for any expense the child may have,” explained Harris. “There are no rules on the use of the money or how it is invested. However, when the child becomes the age of majority, the account becomes theirs. Just remember the account is considered owned by the child, thus, it can impact their ability to receive financial aid in the future.”