The Beginners Guide to Getting Started on College Savings

Wanting to make sure you have a plan for your kid or kids to have a savings plan for college? The money you devote to tucking away will be an investment in their future as well as yours. When heading down this road, make sure you are saving for yourself first. Doing this will also ensure some stability for the kids before you start committing financial resources for them. This includes looking into filing a will, getting term life insurance and obviously saving for retirement.

Start thinking how much can you afford to put away after accounting for the above as well as the day to day expenses. College funds should be set up in a way that you can’t easily dip into them when an “emergency” comes up. Also doing a little research on financial advisors and getting some recommendations from someone you trust isn’t a bad route even if you are confident in your ability and discipline to do it yourself.  It’s always a good idea to get a second opinion to check your options and get feedback. Discovery of something new may even present itself through the process.

529 Plans

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These are tax-advantaged savings that are used to incentivize saving for future college costs. They are also known as “qualified tuition plans.” These plans are made available by each state or their state agencies and/or individual colleges themselves. They are authorized by the IRS Code under Section 529. The 529 comes in two forms of either a pre-paid tuition plan or college saving plan. Pros of these plans are that they are hands off, avoid taxes, high contribution limit, can switch beneficiaries, and has little impact on financial aid. Cons are that they must go towards higher education, limited control and some fees.

Coverdell Education Savings Accounts (ESAS)

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This account comes as a trust or custodial account that is also tax-advantaged and used to promote savings for college and the expenses that come with that investment. They are authorized by the IRS Code under section 530. Introduction of these funds were from the implementation of the Taxpayer Relief Act of 1997. Pros are that they avoid taxes, there is control of the account, money can be used for other uses besides college, minimal impact to financial aid and beneficiaries can be changed. Cons of this fund is that it is limited to $2,000/yr per child which doesn’t sound so bad with our budget as well as the $220,000 limit of income you earn under adjusted gross income. You also can only contribute until you kid is 18 and the money must be used by the age of 30 or the remaining funds will be taxed.

A couple other options are Custodial Brokerage Accounts and US Treasury Bonds. These are pretty easy and not very expensive and maybe not a bad choice to get started. However there are minimal tax advantages and although you hope your kid is responsible, once they are considered adults according to various state laws, they will then have full control of the account. Another downside is that they may hamper financial aid eligibility.

My parents were very supportive of me continuing my education and certainly helpful when I needed it, but all of my college was paid for by financial aid and other money I was able to come up with personally. I think that there is something to be said to that effect and have or will have an expectation that my daughter will come up with a portion of the finances while we will provide some assistance. I think that it’s important to have “skin in the game” and provide a little incentive to do put forth a solid effort.

Have you looked into saving for your child and what recommendations do you have? Please let me know, I’m all ears.

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