Q: What is the Best Way to Save for My Child’s College Education?
A: One of best ways to save for your child’s college education, assuming the child will definitely go to college, is through a state operated “529” plan. These plans provide tax benefits and are named for Section 529 of the Internal Revenue Code.
There are two types of 529 plans: 1) a prepaid tuition account that, in effect, lets you pay tuition and fees at today’s prices for college attendance at a later date, and 2) a college savings account from which the money may be drawn to pay expenses as they are incurred.
All 50 states sponsor college savings plans, but not all sponsor prepaid tuition plans. Individual colleges and universities are also eligible to sponsor prepaid plans, but not many do.
A college savings plan allows the investment of money in stock market instruments such as mutual funds and money market accounts. Therefore, your money is not guaranteed as in a savings account of certificate of deposit. The earnings in a 529 plan, however, are not taxed while accumulating or when withdrawn for eligible expenses. Eligible expenses include tuition and fees, room and board, books, and computers if they are required.
The catch of 529 college savings plans is that to avoid the payment of taxes, plus a 10% penalty, the money must be used for eligible college expenses. If your child decides not to go to college, you pay the penalty on top of income taxes.
In a prepaid plan, you are investing a pre-determined amount of money that depends on the age of your child and the amount of college hours/tuition being purchased. You don’t concern yourself with the investments. In a college savings plan, you can design your own investment portfolio from the instruments offered, or you can buy into a portfolio managed by the state plan. Typically, there is a residency requirement for state sponsored prepaid plans, while you can buy into any state’s college savings plan.
An alternative to a 529 plan, if you’d like to have more flexibility about how your child’s educational funds are used, ask us about the benefits of a Wealth Creation Trust. There are no tax benefits for this kind of educational savings, but there is plenty of asset protection built in and support for your child to explore alternative educational opportunities.
If you’d like to ensure that you can meet the financial challenges of raising a family, schedule a Family Wealth Planning Session.™A Personal Family Lawyer® can review your existing plan and help you make adjustments that will help you achieve your goals.