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Considering Your College Savings Options

Considering Your College Savings Options

| June 13, 2017

It’s graduation party season here in New Jersey and across the country, which means many parents are reminded that college is one year closer for their child.  Often, parents feel that saving for their kids’ college costs is just as or more important than their own retirement. While understandable, this could be dangerous.

The rising cost of college can be intimidating, however it is a fraction of the cost of retirement, which increases year after year as well. There are several options available to parents to help prepare for college expenses, so many if fact, that it can be overwhelming to choose the best option for your unique situation. Planning ahead may help parents from draining retirement funds for college when that time comes, which could make retirement planning more difficult if not impossible. Here is an overview of education funding options to help you understand what each plan is and which might be appropriate for you.  Often, a combination of two or more strategies may prove to provide a balanced approach to education specific, often tax advantaged options with flexibility for non-education use as well.

  • 529 Plans are offered by states and contributions can come from anyone (relatives and friends). Investors should consider the investment objectives, risks, charges and expenses associated with the underlying securities before investing, found in the investment prospectus. Before investing in a 529 Plan, consider the potential home state’s plan which may offer state tax or other benefits as one of many appropriately weighted factors in making an investment decision. The investor should consult his or her financial or tax advisor before investing in any state's 529 Plan.  The 529 plan offers tax deferred growth and when used for qualified education expenses, such as tuition, offers tax free distributions of the growth within the account.
  • Coverdell Education Savings Account Plans, unlike 529 Plans, Coverdell accounts are owned by the child. This plan can be used for qualifying education expenses including expenses prior to college.  This plan is often considered when private high school, for example, is part of the planning needs. 
  • UTMA/UGMA Plans are plans that vary from state to state.  These plans are subject to taxes every year and are held in the child’s name; therefore, the tax responsibility is on the child.  In many states, the account is transferred to the child’s ownership at age 18.
  • Non-Qualified Portfolio often made up of mutual funds and/or ETFs, but can be invested in many types of other securities, offers flexibility in the use of the funds by not being required to be used for education. There are no specific tax benefits to this type of account which is subject to capital gains and losses as well as dividend and interest taxation.  For investors in higher tax brackets who desire the flexibility of this type of account, tax management of the investments should be considered carefully.
  • Specially Designed Life Insurance is another option that is not education specific, however, may also be used for education savings. When structured properly, cash value accessed for any reason, not just education may be income tax free and life insurance enjoys the benefits of tax deferral. 

It’s important to start the conversation today to see how all of these college plans and non-college specific plans work with financial aid and within your financial situation to determine the best fit or combination.  Blending your personal preferences with sound planning can help you work toward your education goal without bankrupting your retirement goal.  Contact us today for a complimentary education planning and retirement planning analysis by emailing: