College Money-saving Options Savings Accounts 529 Accounts Iras And More
The cost of a college education has risen dramatically in recent years. Current average annual tuition and fees at 4-yr public colleges is $6,185, and $23,712 for private colleges. And the price designate 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 old? 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 account 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 primary 6% to withhold 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; narrative doesn’t have to be ragged 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Cons: May have to pay taxes on some or all of amount withdrawn; IRA contribution limits; IRA income limitations; depleting your retirement savings for college expenses; investment risk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 acquire 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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Filed under Coverdell College Savings by on Oct 11th, 2011. 