Which College Savings Fund is Best for Me?
We all know the expression: “Little kids, little problems; Big kids, big problems.”
Well, we can certainly add, “College-age kids, expensive problems” to that adage.
It’s hardly a secret that saving for your child’s education is one of every parent’s greatest challenges and biggest stressors. So you probably need a savings plan…especially since no one wants offspring to have a lifetime of student-loan payments to contend with. But with so many options, how do you know which one is best for you?
Here are some basics, to help you decide which you’d like to learn more about. Keep in mind that sometimes a combination of two or more of the following works best:
- 529 Prepaid Plans. It’s always best to start by understanding what you may already be entitled to. So if your state offers a prepaid option (many do), this is something to look into. Since college tuitions are always on the rise (at approximately 5% per year), the prepaid option offers a way for you to lock in current costs for future tuition at in-state schools by agreeing to pay for them, gradually, in advance. Public and some private schools are usually covered. One potential drawback: If you withdraw the money for non-college or out-of-state college purposes, you will get the money you’ve contributed but, most likely, without any growth. You’ll also lose any premiums you’ve paid if your state requires them.
- 529 Self-Directed Savings Plans. Unlike the state-specific plan above, these plans allow the money you’ve invested (these are after-tax contributions that grow without tax ramifications) to be applied at any accredited college. Savings here can be applied not to just tuition, but to room, board, and books. To buy this kind of plan, you’ll need a broker. While that cost will also be included, you’ll receive that broker’s investment guidance based on your specific goals and situation. This could be very helpful.
- Savings or Checking Accounts. Think saving like this is “old school?” Could be, but regardless, most Americans still save for college this way. What’s great here is that there is infinite flexibility when it comes to allocating this money (so may require willpower to keep for it’s original, educating purpose). What’s not great is that this money barely generates interest over time.
- Roth IRAs. These plans are used for retirement and/or educational savings. Since after-tax contributions grow tax-free in these scenarios (see the 529, above), the money grows via investments that can be made independently or with an advisor. Money can be withdrawn without penalties for education purposes, but can also impact retirement goals for folks who are using the IRAs to save for both purposes.
- Education Savings Accounts. Similar to 529s, an ESA allows tax-free withdrawals and investments. Contributions and contribution periods are much more limited.
- Trusts. Trust accounts are assets transferred to a child’s account and invested on his/her behalf until the age his/her state pronounces. Regardless of the intention for this plan, the child can use this money for whatever reason he or she likes. It can also stand in the way of financial aid offers.
Regardless of how you choose to save, it’s best to pick a plan sooner rather than later. Planning is the key to financial health. Turn to Squeeze for more information and for help managing all aspects of your current and future finances.