College ain’t cheap. You’ll need about $250,000 to send your bundle of joy to college in 18 years.
But you’ve got a few choices on how to save that quarter-mil:
- Coverdell Savings (aka Education IRA)
- UTMA
- Prepaid plans
- Savings or brokerage account
- 529 Plan
We cover them each in detail below.
Coverdell Savings
Save after-tax money and as long as it’s used for school, it grows tax-free. But you can only save $2,000 per year per kid. $2,000 for 18 years is $36,000… well short of your quarter-mil. Not ideal.
UTMA (aka Uniform Trust to Minors Act)
You can save as much as you want, but the gains will be taxed and more importantly – the money is his when he turns the age of majority (18 in most states).
Giving an 18-year-old $250,000 seems like a bad idea to me, but you decide. UTMA’s also ding you on applications for student loans and financial aid. Doubly not ideal.
Prepaid Plans
Pay for state college now instead of in 18 years. But it only covers tuition and it limits your choices to state schools (most likely). And the return on your savings will be limited to college inflation – historically 6% and most recently only 3%. Triply not ideal.
Savings or Brokerage Account
You can save as much as you want and you will determine how the money’s spent and she can go to school anywhere. But you will pay taxes on interest and capital gains.
529 Plans
Save after-tax money and if it’s used for college, it grows tax-free. You can save (almost) as much as you want. You control how the money’s spent. And some states even give you a tax deduction.
The catch: if you don’t use the money for college you’ll pay taxes and a 10% penalty on the gains.
529 Plans are usually the way to go. But you don’t want to overfund it because of the taxes and penalties you’ll pay if you don’t use it for college.
So most often we’ll fund a 529 plan enough to pay for a good in-state school. And if our Financial Zen member wants to cover the cost of a Stanford/Harvard/Yale then we’ll fund that portion in a regular old brokerage account.
College planning is super complex.
We didn’t even cover how much you need to be saving.
Be sure to talk to your financial planner about what’s right for you. And if you don’t have one, feel free to contact us. We’d love to help.
