College Money-saving Options Savings Accounts 529 Accounts Iras And More

The cost of a college education has risen dramatically in recent years. Novel average annual tuition and fees at 4-yr public colleges is $6,185, and $23,712 for private colleges. And the imprint imprint continues to rise at a rate of over 6% per year.

So, if you have children and you’re planning on paying for them to attend college, you need to start saving NOW for college. Your oldest child isn’t even in kindergarten yet? Start saving now. Your baby is only 6 months broken-down? Start saving now. Don’t even have kids yet, but think someday you might? Start saving now (I’m only half-kidding).

How should you save? Let’s briefly look at some of your options:

Regular bank savings fable for your child

Pros: Easy to set-up and make deposits & withdrawals; money can be used for anything

Cons: No tax advantage; money unlikely to earn the necessary 6% to keep pace with rising tuition costs

Coverdell Education Savings Account

Pros: Tax-deferred earnings; tax-free withdrawals for education expenses; can be used for primary & secondary school expenses

Cons: May only contribute $2000/yr; income limitations (cannot contribute if income is greater than $220k married, or $110k single); unless Congress makes a change, beginning in 2010, you will not be able to use the money for K-12 expenses, and annual contribution amount will decreased to $500; investment risk

Your IRA or Roth IRA

Pros: Tax-deferred earnings; account doesn’t have to be used for college expenses; no 10% tax penalty for withdrawal for education expenses

Cons: May have to pay taxes on some or all of amount withdrawn; IRA contribution limits; IRA income limitations; depleting your retirement savings for college expenses; investment risk

529 Accounts

Pros: Tax-deferred earnings: tax-free withdrawals for secondary education expenses; high contribution limits; no income limitations; ability to transfer the account to any other child

Cons: Money must be used for secondary education expenses (otherwise, you’ll pay tax on the earnings and a 10% penalty, though there is an exception for death, disability, or receipt of a scholarship); investment risk

You’ll notice I listed investment risk for most of the above. To try to match or exceed the 6% rising tuition cost, you’re going to have to bewitch some risk. So I’ll offer the standard disclaimer: Any account invested in mutual funds, stocks, bonds, etc. bears risk. There is no guarantee your investment will go up in value.

To learn more about tax implications for education expenses, you can check out this IRS publication (warning: it’s 80 pages long and it’s written by the IRS).

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