Kate and William may not have to worry about paying for Prince George’s schooling—I hear the Queen has a few pounds stashed away under the royal sofa cushion—but for the rest of us, paying for our child’s college career is a life-long endeavor. And while your baby may not be an official “Royal”, they’re still pretty regal in your eyes, and deserving of the best education possible. If you have a newborn or young child and you’re starting to think about how to pay for their college education, you can start saving now. You have several options at your disposal, each of which has particular advantages. Even better, you can access these accounts through a credit union or bank near you. Stop by the nearest branch to find out more.
529 Plan (Qualified Tuition Plans)
A 529 plan is a long-term, tax-advantaged investment plan provided by a state or educational institution. All funds used for qualified educational expenses are not subject to federal taxes, and in most cases, not to state taxes either. There are few limits to contributions as long as they do not exceed the amount required to pay for qualified education expenses or the $13,000 per year gift-tax allowance ($26,000 for married couples). Some plans allow for large single contributions for multiple years of college expenses to be made tax-free at one time. Plans can be transferred to siblings without tax penalties. The downside to 529 plans is that they can impact how much financial aid your student receives. Plans vary from state to state, but there are two main options:
- The prepaid tuition plan allows you to set up an installment plan to buy tuition units or a contract for 1-5 years of tuition at certain colleges or universities within the state that you reside. There are different options for public and private schools, and transfer options for out-of-state colleges or universities.
- The college savings plan allows funds to be used on any qualified education expenses, and tends to be more flexible than the prepaid plan. Unlike the prepaid plan, the college savings plan involves an investment account and is subject to market risk.
Middleburg Bank – Middleburg, Virginia
Middleburg Bank offers professionally managed 529 College Savings Plan investment portfolios. There are no income limits for contributors.
Financial Partners Credit Union – Downey, California
529 College Savings Plans at Financial Partners Credit Union give you the option of transferring unused money to another child. Also, the plans are not restricted to children—adults can be the beneficiaries as well.
Coverdell Education Savings Accounts
A Coverdell Education Savings Account (ESA) is an account designed to fund a student’s future college expenses. The beneficiary of the account must be under 18 when it is opened and total contributions must not exceed $2,000 per year. A big benefit offered by Coverdell accounts is that the money in the account is not taxed, and the student will not pay taxes on any amount, as long as it is less than qualified education expenses. Accounts can be transferred to siblings’ accounts without penalty. Also, funds can be used for qualified secondary and elementary schools, unlike with a 529 plan, which are just for post-secondary education. The downsides include the firm $2,000 per year contribution limit and income limits for contributors. Funds must be distributed before your child turns 30, or risk being subject to tax penalties.
UMassFive College Federal Credit Union – Hadley, Massachusetts
You can open a Coverdell ESA at UMassFive College Federal Credit Union with a $100 deposit in an IRA Share Account. Parents, relatives and friends can all contribute to the account.
Manasquan Savings Bank – Manasquan, New Jersey
Anyone can contribute to a Coverdell ESA at Manasquan Savings Bank. Contributions are non-deductible.
College Share Certificate/CD
College certificate accounts vary from one financial institution to the next, but mainly boil down to deposit accounts that hold your money for a length of time determined by you and the bank or credit union. The money earns interest while it is stored in the account, but there may be penalties for withdrawing before the end of the term. In most cases, the accounts renew at the end of each term, so you can open an account when your child is young and let the account earn interest for years. The downside is that earnings from a CD or Share Certificate are not tax-advantaged.
SELCO Community Credit Union – Springfield, Oregon
College Savings Certificates at SELCO Community Credit Union are available to any member under the age of 17 who has a Safari Savers Kids’ Club Account or SELCO Teen Vault Account. You can open the account with a $100 deposit and you are allowed unlimited additional deposits of $50 or more. Terms range from 6 months to two years, and the account automatically renews at the end of each term until the account holder turns 18.
Dart Bank – Mason, Michigan
Dart Bank’s College CD has terms of 1 – 18 years and allows additional deposits of at least $25. You can open the account with a minimum deposit of $100.
Uniform Gift to Minor Act/Uniform Transfer to Minor Act Account
Uniform Gift to Minor Act and Uniform Transfer to Minor Act accounts are custodial accounts that can be opened in your child’s name and are managed by an adult custodian (often, a parent). They provide a way for parents to give children assets like stocks and bonds, as well as other property, like real estate. The upsides to a UGMA/UTMA account are that there are no annual contribution limits, the money belongs to your child and any relative can open an account for your child’s benefit. Taxation levels depend on the amount of money in the account and your child’s age and income. The downside is that the money does not have to be used for college expenses, funds are not transferable and when your child comes of age (18 or 21, depending on the state) they can use it for whatever they wish. UGMA/UTMA funds can also negatively impact how much financial aid your child receives.
First Community Bank – Keokuk, Iowa
You can get access to a UGMA or UTMA account at First Community Bank.
Baby wearing crown image courtesy of Shutterstock.