College Savings Options
Right now you are probably thinking “our baby was just born, do we already have to start thinking about saving for college?” Unfortunately the answer is yes. With the cost of a higher education only going up, parents who want to assist their child with these costs will need to put away some cash as early as possible.
There are many ways to save for a college education, each with their own benefits, so it is up to you to decide what works best. Here are a few of the available options:
529 College Plan
The primary advantage of a 529 College plan is that all growth in the plan is tax-free until it is withdrawn for college, meaning that the tax bill goes to the student who will have a much lower income than you.
With a 529 plan, you can make changes if you need to, such as changing the beneficiary of the plan. Also, if for some reason the money is not going to be used for college or you need it for a financial emergency, you can withdraw your contributions tax-free, although you will have to pay a 10% penalty tax on the growth.
Additionally, many plans let you essentially pre-pay tuition in today's dollars, meaning that you save on all of that nasty inflation. There are also various incentives depending on the state that the plan is set up with, so carefully consider all the aspects of each plan before you commit.
A UGMA or Uniform Gifts to Minors Act account is somewhat similar to a 529 College plan except is does not offer the benefit of pre-paying for tuition. While this offers more flexibility in choosing an institution, this means that the child will be paying for tuition at the going rate.
Once a UGMA account is set up, any money in the account has to be used for the child. The owner of the account can withdraw money and use it to pay for educational costs like tuition or equipment but they cannot use it for room or board. Once the child reaches the termination age set in the contract, all money in the account is theirs to do with what they wish.
Another method of saving for a college education is the UGTA or Uniform Transfer to Minors Act account. This plan operates much the same as the UGMA account except it allows for the holding of additional assets such as property, royalties, and patents.
Choosing the right type of savings vehicle for your child's education costs can be difficult, but there are many resources available to help you make the right choice.