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

February 1, 2013

Advisor answers

Jim Mitchell

Jim Mitchell

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, rela...

David Flowers

David Flowers

Certified Financial Planner
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 familie...

James Dowd

James Dowd

Certified Public Accountant, Chartered Financial Analyst
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...

Martin Weil

Martin Weil

, Certified Financial Planner
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. ...

Christopher Arnold

Christopher Arnold

Certified Financial Planner, Chartered Advisor for Senior Living, Chartered Financial Consultant
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 ne...

John Buerger

John Buerger

, Certified Financial Planner
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 allo...

Guy Baker

Guy Baker

Accredited Estate Planner, Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant
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 ...

Jay Freeberg

Jay Freeberg

Accredited Wealth Management Advisor, Certified Financial Planner, Chartered Financial Analyst, Certified Divorce Financial Analyst
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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