Managing your financial life is not just about money.

Options for College Savings: Part 1

As a parent of three kids, saving for college is always in the back of my mind. It can be a constant source of stress, but remember that there are options!  My next few articles will take you through three different college savings options, discussing the pros and cons of each:

  • 529 College Savings Account
  • 529 Pre-paid Tuition Plan
  • Uniform Gifts/Transfers to Minors Act

Let’s take a look at the first:

529 College Savings Account

A 529 (as it’s called for short) is a tax-efficient college savings vehicle owned by the parent/grandparent, with the child as the beneficiary. It is an investment account in which interest/dividends/capital gains are not taxable, and withdrawals from the account are tax-free if used for higher education.  You can invest in any state’s plan, and the child can attend college in any state, regardless of the location of the original 529.

Pros of a 529 College Savings Account

  • No taxes, as long as funds are used for college
  • Owner (adult) controls the account and underlying investments
  • Can be redeemed at any time
  • Beneficiary can be changed at any time, as long as the new beneficiary is a family member
  • If parent is owner, it counts less against the child when applying for financial aid
  • Can typically be used for tuition and room and board

Cons of a 529 College Savings Account

  • Can only be used for higher education, not grade school/high school.
  • If funds withdrawn are not used for college, the owner will pay taxes and a penalty on any earnings.
  • If grandparent is owner, is not factored in for financial aid for the first year.  But when funds are disbursed for that child, that money is reportable on the following year’s financial aid application and is considered student’s income. Potentially a good reason to use grandparent-owned 529 money for the last year(s) of school.

Remember, like saving for any goal, the earlier you start, the better!

And don’t forget to read the rest of our 3 part series on college savings:

Part 2- 529 Pre-paid Tuition Plan

Part 3- Uniform Gifts/Transfers to Minors Act.

 

Sources:

http://www.mefa.org/saveforcollege/saveforcollege.aspx?id=1328#H

http://www.finaid.org/savings/tuition-inflation.phtml

 

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