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Four Ways to Save for Your Child's College Education

We discuss some of the most popular college savings vehicles for most Americans.

If you’re like millions of other Americans, one of your primary financial goals is to send your children to college debt-free. But with college costs rising more than twice as fast as overall inflation, this goal may be harder to achieve than ever before.


What’s more, you may be facing other competing financial priorities while trying to save for college, such as saving for retirement and possibly helping to support aging parents. “In this kind of challenging environment, parents need to pull out all the stops financially if they want to ensure a debt-free college education for their kids,” says Jerry Toney, CFP®, President, Senior Wealth Advisor, Cadence Investment Services.


Popular Education Savings Tools

The good news is that there are a number of different savings tools at your disposal to help you meet your college savings goals. Toney says the following are among the most popular college savings vehicles for most Americans:


1. Section 529 plans


Named after the section of the Internal Revenue Code that created them* in 1996, these have become the college savings plan of choice for many American families. Section 529 plans offer the benefits of tax-free distributions and tax-deferred growth. 


*Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.


According to Toney, Section 529 plans come in two forms: prepaid tuition plans and investment savings plans. The former enable you to lock in future tuition at today’s rates, while the latter allow you to seek market returns on your contributions by investing them in securities, mutual funds and ETFs (or exchange-traded funds). All states now offer at least one 529 plan from which you can choose.


2. Coverdell Education Savings Accounts (ESAs)


These were originally established as Education IRAs, with an annual contribution limit of just $500. But when the contribution limit was raised to $2,000, they became a more viable college savings tool used by many families in conjunction with a Section 529 plan. 


ESA contributions aren’t deductible, but they feature tax-deferred growth and tax-free withdrawals if the money is used for education expenses. And unlike the money in 529 plans, ESA funds don’t have to be used for college expenses. “This may be beneficial if your child receives financial aid or scholarships,” says Toney.


3. Custodial accounts


Before Section 529 plans and Coverdell ESAs, custodial accounts (or UTMAs and UGMAs) were a common vehicle for college savings as they allow adults to transfer assets to a minor. These are special accounts established by parents and grandparents for their children’s or grandchildren’s benefit.


Custodial accounts don’t feature tax-free distributions and growth, but they do offer another big tax benefit: The earnings are taxed at your child’s rate instead of your presumably higher tax rate. And there are no annual contribution limits for UTMAs or UGMAs.


4. Roth IRAs


While Roth IRAs are usually considered to be retirement savings tools, they can also be used to save for college. “With this kind of flexibility, Roth IRAs can be a valuable tool to save for both college and retirement at the same time,” says Toney. In 2017, you and your spouse can each contribute up to $5,500 (or $6,500 if you’re age 50 or over) to separate Roth IRAs for yourselves. 


In general, you can withdraw Roth IRA contributions before you turn 59½ years of age for whatever reason you choose — including college expenses — without paying any tax or penalties. “So one strategy might be to withdraw some Roth IRA principal to pay for college expenses while leaving the Roth IRA earnings intact for retirement,” Toney adds.


Get Started Now

Of course, the sooner you start saving for your children’s college education, the better. But Toney stresses that it’s never too late to get started.


“The best time to plant a tree was 20 years ago, but the second best time to plant a tree is today,” he says. “Even if your child is in his or her teenage years, you can still benefit by using one or more of these tools to get a jump start on building a college savings fund before your child enrolls in college.”


If you have more questions about saving for college, please contact Cadence Investment Services at 662-324-4724 or visit us online for additional information.




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This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.

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