Feb 20, 2006

College Savings Series Part I: Options - Financial Tip of the Week (Feb. 20)

This is the first post in what will be a series on saving for college. I won't post on a schedule, but rather I'll share what I learn as I research my own options for saving for Alex's education.

To the best of my knowledge, there are three major options for tax-advantaged college savings. I'll summarize them below and discuss them in greater detail in the future:

  1. Coverdell Education Savings Accounts: These were formerly known as Education IRAs and they work a lot like Roth IRAs. You contribute up to $2,000 per year (of your post-tax money) and it grows tax-free. You can choose investments as you would with an IRA so it's up to you to manage the asset allocation. Money in Coverdell accounts can be used to pay for education-related expenses beginning in kindergarten.
  2. 529 Savings Plans: These are the most popular college savings plans these days. Every state has its own plan, but you're not limited to the plan offered by the state you live in. Your contributions grow tax-free and contribution limits are high. You can choose from various prepaid tuition plans or investment-based plans. Investment options tend to be more limited than with Coverdells - for example, in California, your choices are a "Guaranteed Option," which is basically like investing in a CD, two age-based asset-allocation plans, and two 100% equity plans.
  3. U.S. Savings Bonds: Parents can redeem bonds without tax consequences if the bonds were purchased in their name after they turned 24 to pay for tuition and fees if they meet certain income limitations.


Anonymous said...

A 529 is the way to go. It has the most flexibility. We have a 3 year old but I actually opened the 529 in my wife's name shortly after we discovered she was pregnant. Just had to switch name to my daughter after she was born. Not that we have another child on the way I just have to add their name to the account.

If they get a scholarship later on the money is ours. If I decide they are not going to college on a 10% tax on the gains!

Anonymous said...

I agree - the 529 is great!!

Unknown said...

I need help investing in a 529. I don't even know where to begin. Can someone help me?

Chief Family Officer said...

@Tiffani - Saving For College is a good place to get started with basic information and plan comparisons.