There are various vehicles to save for college. Some are tax advantaged, others have less spending restrictions and others are flexible regarding the investment choices or how much can be contributed. As such, the vehicle of choice depends on individual circumstances and personal goals.
529 College Savings Plan – a tax-advantaged investment vehicle offered by all states. These plans are flexible as 1) to how much money you can put away (with certain maximums that can be invested per beneficiary) and 2) you can choose any plan from any state. The money may be used for tuition, room, board, mandatory fees and required books/computers. The earnings are not subject to federal tax (or state tax in most cases) as long as the money is used for qualified college expenses.
Pre-Paid Plan – currently 10 states offer these plans where you lock in the cost of education in the future for a determined price today. These plans are not as flexible as the 529 Savings plan in that 1) the monthly/annual investment is determined by the cost of college and 2) you benefit from the plan in the state where you live. (i.e. the full benefit for the Florida pre-paid is attained by attending a college in Florida. There are specific deadlines for enrollment (typically ends at the end of February). For more information please visit www.myfloridaprepaid.com .
Education Savings Account – allows individuals to deposit up to $2,000/year in an account for an eligible beneficiary (child) without being taxed on the earning from interest, dividends, appreciation, etc. as long as the child uses the funds before the age of 30 for a qualifying expense.
Custodial Account – an account managed for an adult on behalf of a minor (18 or 21 depending on the state of residence. This account is the most flexible regarding investment amount and use of the money as it is not specifically an education funding account. Therefore, the funds can be used at any time and for any purpose. The tradeoff is that it is not tax advantaged as the earnings are subject to federal and state tax.
Roth IRA – an individual retirement plan where contributions are not tax deductible and qualified distributions are tax-free. Education expenses such as tuition, fees, books, supplies room-and-board may be considered a qualified expense given they meet certain criteria as dictated by the IRS Code. The limiting factors are that one cannot save more than $5,500/year ($6,500 if the owner is over the age of 50) as per the 2016 IRS limits. In addition, one of the criteria for expenses to be qualified is that the distribution must be taken at least 5 years after the owner established the Roth IRA.
As can be seen, there are several considerations when choosing which plan makes the most sense for your child. We advice seeking guidance from a financial professional to best assess which strategy or plan would best be suited for your particular circumstances.
Advisory services are offered through Allgen Financial Advisors, Inc., a registered investment advisor.
Any information provided in the blog has been prepared from sources believed to be reliable, but is not guaranteed by Allgen Financial Advisors, Inc. and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. Allgen Financial Advisors, Inc. and its employees may own options, rights, or warrants to purchase any of the securities mentioned in this e-mail. This e-mail is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this message in error, please contact the sender immediately and delete the material from your computer.
