How do I select a college savings vehicle for my child? When should I start one?

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  • 2 out of 2 people found this answer helpful

    CFP®, MBA, MSFS Irvine, CA

    The sooner you start, the longer time you have to let compound interest help you along the way.

    There are two vehicles - one is your state's 529 plan. This allows the money to grow tax deferred.

    The second would be a low cost, high cash value life insurance policy. If it is designed correctly, it will allow you to protect your child's education if you died before you completed the plan. But more importantly, it allows you to accumulated significant cash tax deferred to pay for his education.

    So I would look at both methods and see which one makes the most sense for you.

    Hope this helps.

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  • 1 out of 1 person found this answer helpful

    CFP®, MBA Sonoma, CA

    College tuition, one of the single largest financial challenges for a family, can range from $8,500 (2012 average cost for in-state public tuition and live-at-home) to more than $40,000 (average tuition, room and board for a private university) annually.  These costs have been rising at a rate far faster than inflation.  

    I advise clients to start making regular contributions to a 529-college savings plan at the birth of a child, but only after they have taken full advantage of all their retirement funding options.   Retirement saving comes first in my book because, as one client said to me, “They don’t give scholarships for retirement.”


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  • 2 out of 5 people found this answer helpful

    CFP® San Francisco, CA

    There are a few different college savings vehicles that exist such as 529 plans and Coverdell Savings. IRA funds can be used for education, too. Some use government savings bonds. Others don’t even use accounts specifically designated for education and instead put education savings directly into investment accounts, real estate, or even collectibles.

    Benefits of 529s, Coverdells, and IRAs are that gains in the accounts are not taxed as they grow. When used for qualifying educational expenses, the asset growth in these accounts is never taxed which allows the funds to be put entirely towards school.

    Another worthy vehicle you can use to fund to college is a permanent insurance policy.  The cash value in a permanent policy accumulates tax deferred and can be accessed tax-free when properly structured. Unlike 529s, Coverdells and IRAs, the cash value in the policy may not be counted as an asset for financial aid purposes at public universities. Permanent life insurance can be a great way to provide an instant estate for your heirs while at the same time setting aside for college and other expenses.

    A college savings plan should be started as soon as possible. I’ve had some clients want to establish plans when they were pregnant! The reason to get started early is that it allows the asset value to grow from contributions as well as from compounding interest.

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  • 1 out of 2 person found this answer helpful

    San Francisco, CA

    529 College Savings Plans have become the most common and useful savings and investment vehicles for college expenses.  529 plans offer an opportunity for family or friends to contribute to tax sheltered (if used for qualified college expenses) funds earmarked for your children, or other family member’s education.  They are powerful savings tools and should be started as soon as possible to take advantage of the benefits of both tax deferral and compounding of returns that can last for many years i.e. until your child, relative or friend reaches college. 

    In selecting the appropriate plan you should look first look at your home state’s plan.  Some states offer tax deductions and tax credits to their residents that are only available to that state’s residents.  However, you are free to select any 529 plan offered by any state.

    Next you should look at the cost of the plan.  High costs can eat away at investment returns over time.  Many states offer 529 options that include Vanguard mutual funds.  Vanguard is the largest provider of index mutual funds and and is known for its low costs.

    Finally you should look at a 529 plan’s investment lineup.  Usually each state offers both age-based and static portfolios.  Portfolios are available covering all risk appetites.  In age based portfolios the makeup of the portfolio becomes more conservative the closer the funds are needed for college.  If you are funding college for a newborn then your portfolio will be heavily allocated to equities but if college is next year then short-term bonds will be prevalent.  Static portfolios are the do-it-yourself option where portfolios will remain unchanged unless you elect to rebalance them or change the investment mix on your own.

    At the end of the day it is important to balance potential tax savings of state plans that offer tax deductions and credits against the overall quality of the plan i.e. its low costs and investment options.  If you have children, grandchildren, nieces, nephews or friends you would like to help do not hesitate to start one now.


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  • 1 out of 2 person found this answer helpful

    CFA, CPA San Francisco, CA

    Few investment questions have black or white answers, but this is one of the few.  Assuming you are already contributing the maximum to retirement accounts like a ROTH, the best college savings vehicle is the 529 plan.  Contribution limits are high, investment options are good if you choose one of the best plans, investment gains are tax-free if used for qualified education expenses, and there may be additional tax benefits depending on your state of residency.  Self-directed plans are the most cost-effective.  If you want help selecting a specific plan or investments, it would generally be more economical for you to hire an independent planner to help you choose the investments in a self-directed plan than to invest in a fee-laden “advisor” plan.  Some firms offer recommendations for a flat fee, and most advisors should include 529 plan recommendations as a part of a comprehensive financial review.  Start saving for college as soon as you can to maximize the tax benefit afforded by these programs.  If it turns out that your child does not need the money for college, these plans offer broad flexibility to designate a new beneficiary.  In a worst-case scenario, the account can be liquidated and investment gains become taxable and subject to a 10% penalty. 


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  • 1 out of 3 person found this answer helpful

    CFP®, MSFS San Luis Obispo, CA

    The most important advice to savor from this thread is to start early and save as much as you can. College is expensive. Today's Cost of Attendance at $25,000 to $40,000 (average - many are much higher) is a serious hit to the modest wealth of most American families ... and costs are still rising at over 5% per year.

    Most advisors will tout 529 plans ... and they are good, with plenty of tax advantages so they can beat traditional investment accounts. They are flexible (if a student decides not to go to college, those funds can be allocated to a sibling or other student) and they are accessible.

    Chris Arnold mentions cash value life insurance which is invisible to the financial aid process for all but two schools in the United States (not just limited to public universities as he suggests). As a college funding specialist, I have used these policies on numerous occasions ... although I must put out a warning that there are a lot of life insurance sales people out there who use this vehicle and annuities as an excuse to sell you a potentially very expensive product.

    There ARE other factors, too. Is college right for you, your family and your student? For some types of work it is critical. For others, not so much.

    What I do believe gets lost in the shuffle of much of the advice is the reality that each student is different. They all have different needs. One schooling path could be the perfect fit for your first born and that same school could end up as a total disaster for your second child.

    That said, your "college savings" can become your "retirement savings" should college prove to not be a viable option. But you will have neither if you don't start putting something away today. That sets up your family for more debt and an even less secure future.

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  • 0 out of 3 people found this answer helpful

    CFP® Berkeley, CA

    College savings can be a big expense for families and it is important for parents to plan ahead if they intend to take on this expense for their child.  When parents or grandparents ask about college savings they are generally referring to the tax advantaged savings vehicles that have been set up or enabled by Congress.  This category includes 529 College savings plans administered by the various states, Education savings accounts (ESA) and US Savings bonds.

    Of the three, the 529 plan is usually the best option for families with sufficient time to invest before their child attends college.  The main advantage of 529 accounts is that they actually allow you to save enough assets to pay for college, the other tax deferred accounts do not.  ESA and US Savings Bonds have contribution limits that are too low to accumulate sufficient savings.

    529 plans are administered by each individual State but you don't have to live in a particular state to invest in that State's plan.  Money is contributed to the plans on an after-tax basis.  When funds are withdrawn to pay for qualified college expenses, the money is not taxed.  For example, if you contributed $60,000 to a 529 plan and it grew to $120,000, none of the $60,000 of gains would be taxed if used for approved expenses.  Approved (or qualified) expenses are things like tuition and books but do not include off campus housing or expenses to travel home from college.  If money is withdrawn for non-education purposes, it is taxed at your ordinary income rates plus a penalty is applied.

    The person who sets up a 529 plan is the owner of the plan and the child they designate is the beneficiary of the plan.  The owner of the plan can change the beneficiary of the plan to another child (with certain family member restrictions) if they so desire.  This might happen if one child does not attend college or if there is money left over when an older child finishes college and the parents want to use the remaining money for a younger sibling.  There is no penalty for changing beneficiaries.

    The time to start a college savings plan is, as you would expect, as soon as possible.  The earlier you start the plan, the more time you will have to save and the more you will benefit from the compounding of the investment returns.  Ten years before the child is expected to attend college is a good benchmark but sooner is certainly better. The more relevant question is when should you NOT start a plan.  You should not lock up money in a college savings plan if your child is within a few years of attending college.  In that situation you are putting restrictions on money that will not have enough time to grow to make the tax deferral worthwhile.  In that situation you are better off keeping the money in taxable accounts with a very conservative investment strategy.


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  • 0 out of 1 people found this answer helpful

    CDFA Garden City , NY

    College savings should include several different types of accounts - depending on your situation.  Look to use your state 529 Plan - depending on tax deductibility and fees; then I would look to use a UTMA - an account in your child's name - taxed to your child - although the tax impact will likely be negligible; and then partially in your name.  A lot depends on your tax bracket, age of the child, and the type of 529 plans available in your state.

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    Advisors offer free consultations to determine if you're a good fit for one another. Providing more information in the consultation request will help advisors have a better sense of what you're looking for. The advisor will contact you via email and set up a time to meet. Depending on the advisor, and your preferences, this could be an in-person or online meeting. You are under no obligation to engage them after meeting with them.
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