Finding ways to save for kid’s college.
Every year, millions of American students enter college for the first time. With their future careers unpredictable, incoming university students have thousands of higher education options at their disposal, all with a varying price tag. For some, their college journey can begin when loved ones start saving to make the college dream possible. Whether they choose to attend a university, community college, trade school, join the military, or go straight into the workforce, there are several savings options out there that can help.
One popular method includes putting money into eligible savings bonds. Series EE and Series I U.S. savings bonds, which are available from the U.S. Treasury Department, offer low-risk and modest-return investment for college saving.
“With savings bonds, you pay no state or local taxes on the interest on the bonds, and you can defer paying federal taxes on the interest until you cash in the bond or until it matures,” says Stifel, Nicolaus & Company Financial Advisor Tony Shanley.
These bonds can also be transferred to a 529 account or ESA with no penalty. However, bond buyers must not exceed annual income limits and the dollar amount of bonds purchased must not exceed annual limits to qualify for deferment.
Another method is by starting a Roth IRA. Although they’re not specifically designed for college savings, there are great reasons parents may choose a Roth IRA to cover college tuition. As the money grows tax free, participants contribute after tax dollars, and if a child decides not to attend college, parents already have those funds invested for their retirement. But while making withdrawals for educational purposes has no penalty, Roth IRAs have contribution limits, parents must still pay income taxes, and other relatives will be unable to contribute to the account.
With investing in mutual funds, there’s no limit on what people can contribute, and the money doesn’t have to go toward college. But, all of the fund’s earnings are subject to annual income taxes, capital gains tax will apply when shares are sold, and having these assets can reduce financial aid eligibility.
“Mutual funds offer diversification and professional management, but can be cost-prohibitive,” Tony says.
“Opening a 529 account is a tax-freeway to save and pay for education costs. Missouri’s529 plan is Missouri MOST.”Tony Shanley, Stifel, Nicolaus & Company financial advisor
By putting money into a custodial account, both parents and beneficiaries have greater flexibility of how funds can be spent. Custodial accounts, also known as Uniform Gifts to Minors Act (UGMA) and UniformTransfers to Minors Act (UTMA), don’t have income or contribution limits. This can be especially helpful for expenses that are not covered under ESA or 529 plans, such as sorority/fraternity dues, car expenses, and clothing.
“Opening a 529 account is a tax-free way to save and pay for education costs,” Tony says. “Missouri’s 529 plan is Missouri MOST.”
Other states sponsor their own 529 plans, and like the Missouri Most 529, funds can be used to pay for college, K-12 tuition, apprenticeship programs, and even student loan repayments. With Missouri 529, the plan grows tax-deferred, contributions are tax deductible on Missouri state income taxes (up to $8,000/$16,000 if married fi ling jointly), and there are no penalties as long as the funds are used for qualified educational expenses. However, investment options may be limited, fees maybe high, and if the funds are used for purposes other than education, a 10% penalty will incur on the gain of the original investment (but not the principal amount).It is also highly encouraged to start investing as soon as possible. The more years the account has to grow, the more earnings will accrue by the time kids will need it for higher education.
“I chose the Missouri Most 529 Plan for both of my kids, who are now 25 and 21,” Tony says. “We chose to utilize the age-based investment option.”
Choosing the right plan can be tough, but no matter how much can be saved for college, future students should still fill out the FAFSA and consider all federal aid, grants, and scholarships available. And while investment terms and conditions may differ in each house-hold, a financial advisor can answer any questions to help find a plan that suits the whole family.