When it comes to saving for college, it pays to think creatively. Consider these investment strategies.
To meet the rising costs of college, families are increasingly looking for ways to save rather than borrow, says Jeffrey H. Winick, Senior Vice President and Senior Wealth Strategist with Regions Private Wealth Management. “We see many parents who experienced large college debt when they were starting out themselves. They don’t want their children to experience the same.” The best saving strategies may involve a variety of tools, including the ubiquitous 529 plan.
These plans have become the go-to choice for millions of families, thanks to their tax advantages and flexibility. In a 529 plan, contributions can grow tax-free, and as long as you spend it on tuition or other qualified educational expenses of the designated beneficiary, the money is not subject to federal tax and generally is not subject to state tax.
As for flexibility, 529 accounts enable parents or grandparents to control the money until it’s used, and switch beneficiaries as needs arise. “If one child gets a full scholarship, you can shift the benefits to another child who may be facing tuition at an expensive private school,” Winick says. Of course, there are certain limitations in place. Visit the National Association of State Treasurers website collegesavings.org for up-to-date guidelines.
Looking for ways to ramp up savings beyond the 529? Consider these investment strategies to help you save for college:
Roth IRAs
Roth IRAs, while generally used as retirement accounts, can also be effective college savings vehicles, particularly for grandparents or parents who had children later in life, says Winick. With a Roth, your contributions are after-tax money, but once in the plan your savings grow tax-free, and you pay no income tax if the money is later distributed as part of a qualified distribution. While 529s impose a penalty if the money isn’t used for education, proceeds from a Roth can be used for any purpose. Among the caveats, you must be at least 59½ to remove funds from a Roth tax-free. Although Roth IRAs have maximum income limits, affluent individuals may be able to make a non-deductible contribution to a traditional IRA, and afterward convert to a Roth, Winick says. However, earnings prior to conversion are taxable, and if there are other traditional (deductible) IRA accounts, the resulting immediate tax impact may outweigh any advantages gained through the conversion strategy.
Prepaid Tuition Programs
Prepaid tuition programs are offered by several states. Similar to 529s, these plans typically enable you to prepay state college tuition at today’s rates. You can buy prepaid plans for your child at any age — and with college costs rising each year, the earlier you buy, the greater the potential savings.
Baccalaureate Bonds
Baccalaureate bonds are offered by several states as well. They are usually set up to mature when your child enters college — with a discount on tuition when you use them.
Education for Life
Since different approaches will work best for different situations, it’s best to carefully consider the options and then meet with an advisor, Winick says. Paying for college may be a good opportunity to impart lessons about financial responsibility and money management to young adults. Without swamping your kids in large debts coming out of college, you might ask them to pay for a portion of their college expenses in order to feel vested in their own education.
And there are other ways for your child to have a vested interest in college costs. For example, you might make paying for college contingent on your child maintaining a certain grade point average through high school and during college.
And, when it comes to preparing your child for life, there’s no time like the present. Winick explains, “the earlier you start saving, the more flexibility you have to see what works best, and how that fits into your long-term financial plan.”
Visit regions.com/insights for more advice on how to save for college.
