My wife and I were recently watching a TV show together when a commercial came on for a college savings program. At the end of the ad she asked me, “Is that what we have our kid’s money in?” Her question spurred a discussion about the different types of college savings accounts.
529 Plans are tax-deferred college accounts where withdrawals for college are generally tax-free. The two major types allow you to either purchase college “credits” at today’s rates or to place your money in an investment account using mutual funds. A nice feature is that the beneficiary can usually be changed, if necessary, perhaps to another child. The owner is the parent or custodian who set up the account. The downside with a 529 plan is that there is a 10% penalty on investment earnings upon withdrawal if the money is not used for college expenses.
Another option that has been around even longer is the UGMA, or Uniform Gift to Minors Account. As the name implies, contributions to these are a completed gift to the child but are controlled by the custodian until the child is of age. The funds in the account can be used for any purpose that benefits the child without penalty. However, they are considered an asset of the child for federal financial aid eligibility.
Roth IRAs are retirement accounts either in the parent’s or child’s name, but earned income from a job is required by either one or both to fund such accounts. There are also income limits that may restrict the use of Roth IRAs. Perhaps the greatest benefit of Roth IRAs is that contributions can be withdrawn at any time for any reason with no tax implications. Investment earnings are generally required to stay in a Roth IRA for 5 years and until age 59 ½. A plus is that these accounts are generally not considered part of the “expected family contribution” of either the parent or child for financial aid purposes.
There are just some of the ways to save for college. You can also use traditional savings accounts, investment accounts and even U.S. Government Savings Bonds. Each individual’s tax circumstances will help determine which is best for you and your family.