As soon as our son Gus was born back in November, I started looking into college savings plans. College is expensive today, and reports show that the cost is only going to increase over the next couple of decades. As much as I don’t want to think about that expense, the logical side of me knows that if we take advantage of time being on our side, we can set our son up to have his higher education completely paid for.
- We decided to go with a 529 savings plan. There are two kinds of 529 plans: prepaid tuition plans and simple college savings plans. Prepaid plans are more restrictive—you pick a college or university and begin making payments for credits/units toward future tuition. The benefit is that you get to lock in today’s tuition, rather than whatever astronomical amount it will be in a couple decades. The drawback is that you’re taking away a lot of choice from your child in terms of where he or she goes to school. Plus, there are often residency requirements. A college savings plan allows us to contribute toward a fund that we can eventually draw from to pay for tuition, room and board, fees, books, and computers. We have the option to invest this money in a few different fund options, and we ultimately chose an age-based plan that we’ll be able to adjust as Gus gets closer to college age.
- You may also be interested in a Coverdell Education Savings Account. You can make tax-deferred contributions to these accounts that can, like a 529, be used for educational expenses (including K-12 expenses). There is a maximum contribution limit of $2,000 per year. Additionally, there are income restrictions, but you can get around those by “gifting” money to your children first and then having them make the contribution.
- You can also use certain IRAs (individual retirement accounts) to help pay for college. Roth IRAs, on which you pay tax now, allow you to withdraw from your principle balance tax-free if you’re younger than age 59 1/2 and the money is used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members. Income restrictions apply, however, you can convert an existing traditional IRA to a Roth no matter what your income. Talk to an IRA specialist at your credit union for details.The drawback of using an IRA to pay for your child’s education is that if you’ve ear-marked this money for retirement, you may want to reconsider. You and your children can borrow for college, but you can’t borrow for retirement.
Gus only may be nine months old now… but all I hear from other parents is how you blink your eyes and suddenly they are off to college. Better get a head start on what inevitably will be a costly four years down the line.
Are you saving for your child’s college education?