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Many parents resolve to start saving and investing for college when their children are infants or toddlers. But unfortunately, most don’t start doing so soon enough.
If you have kids age 16 or 17 and you didn’t start saving years ago, you’ve lost valuable time. As a result, you’re probably looking at some painful out-of-pocket payments or hoping for financial aid.
If your kids are younger, you can avoid this angst by considering these college-funding options now:
- 529 plans. These plans, which offer tax incentives for people to put away money, are perhaps the best way to save for college. Contributions and earnings grow tax-free and, in Pennsylvania, contributions can be state-tax deductible. Over the years, your invested dollars can grow significantly if you choose the right funds within your plan. These plans can be quite attractive for well-off parents, as there’s no income limit for participation. The rules allow substantial contributions—up to the total costs of the qualified education expenses of the plan beneficiary.
However, beware of potential gift tax consequences if a single annual contribution exceeds $70,000 per parent. These plans, providing investments through mutual fund companies, are offered by individual states, but you don't necessarily have to live in the state where the plan you participate in is located. Utah has one of the best plans available, using low cost, no-load fund options managed by Vanguard and Dimensional Fund Advisors. Although there are usually numerous investment options to choose from, a low-cost, age-based fund is usually the best choice because, as the child approaches college age, investments automatically shift into more stable, conservative vehicles, such as bond funds.
- Coverdell education savings accounts. Like 529 plans, these allow tax-free growth of invested contributions and earnings if used for qualified education expenses. Coverdells tend to offer a much wider array of investment choices than 529 plans, and can be used to pay for education expenses from kindergarten through college, while the use of 529 plans is restricted to college costs. However, Coverdells limit financing bandwidth because annual contributions can’t exceed $2,000.
- Pre-paid tuition plans. These allow the payment of tuition at today’s rates for kids who will enroll in college in the future. However, the amount you save is reduced by a premium charged by the plan, and the tuition-expense credits derived only apply to certain colleges. You should be aware that these plans, which are state-regulated, have had financial problems. In some states, such as Pennsylvania, these plans have no guarantees backed by the state. Generally, pre-paid plans aren’t the college savings plan of choice because of their problematic history.
Whatever way you choose to invest for college, the point is: The sooner you start, the better. This means setting a budget that reflects consistent commitment to a quality college savings plan. This investment can potentially pay huge dividends in more ways than one.
This content is based upon information believed to be accurate by ISI Financial Group, Inc., and is not intended to provide specific financial advice. Always seek professional guidance before making any financial or legal decisions.
