Saving for College – Options for You and Your Family

in First Person: Our Blog, Personal Finance

If you are a parent of a baby or a toddler, college probably seems like a long way off. Between sleepless nights, potty training and daycare costs, you may have little time to think about higher education. But it’s never too early to start saving for your little one! If you haven’t started saving yet or your piggy bank is barely full, we’re here to break down the college savings options.

529 plans

The most popular college savings vehicles, 529 plans are similar to 401k retirement plans but specific for education. There are two options – direct plans offered by your state or plans available through financial advisors. While direct plans have lower fees, financial companies typically offer more options. With a 529 plan, you can save tax-free and there are a variety of investment options based on the age of your child. The younger your child is the more aggressive the investments are, stabilizing as your child ages towards college.

529 quick facts

  • Funds can be used tax-free for tuition, books, room and board, and applicable fees at any accredited two- to four-year college.
  • The account belongs to the parents rather than the child, so the parents can change the beneficiary if a child does not attend college or uses scholarships or other aid.
  • Money not used for qualified expenses is subject to income tax and a 10% penalty on earnings.
  • More than 30 states offer tax credits or deductions for 529 contributions.

Coverdell Education Savings account (ESA)

Like 529 plans, ESAs can be used for any qualified education-related expense and beneficiaries can be transferred. ESAs are open to single parents earning $110,000 or less, or married tax filers earning a household income less than $220,000. Contributions are limited to $2,000 a year until a child turns 18. Since Coverdell ESAs can be used for private K-12 education needs, an ESA can be a complimentary strategy to other education savings options if you are planning on private schools for your child. As a reminder, First Internet Bank offers Coverdell Education Savings options.

Prepaid tuition

Some states offer prepaid tuition plans that allow parents to lock in current tuition rates. While these plans can save costs, if your child chooses to attend a private school or out-of-state school, you will likely not receive the full value of savings.

Roth accounts

Although Roth accounts are traditionally used for retirement, qualifying educational expenses are eligible for tax-free withdrawals. Roth investments provide greater investment flexibility for seasoned investors, but have contribution limits. Per person, the maximum limit allowed is $5,500 per year. Single tax filers cannot contribute with an income greater than $133,000; for married tax filers, income cannot exceed $196,000. Roth accounts are also included in income for aid eligibility. If your child does not attend college or receives a scholarship, however, you can use the Roth toward your own retirement.

Other options

Certificates of Deposit (CDs) and bonds have generally fallen out of favor, but are still a safe option. Savings accounts have lower interest rates than CDs and bonds, are not eligible for deductions and can be counted as an asset when applying for aid. (Side bar: A First Internet Bank Tomorrow’s Tycoons savings account for your child is a good option to teach your child about saving.)

Another option is a custodial account or trust. These account types cannot be accessed by the beneficiary until the age of 18 or 21, but he or she can decide how the money is used, whether for school, a new car or to travel the world.

Tips for making the most out of college savings

  • Use bonuses, tax refunds and windfalls to amp up savings.
  • Once elementary school begins, put daycare funds into college savings.
  • Ask friends and family for contributions to education funds as a gift for birthdays and holidays.
  • When your child starts a part-time or summer job, allot some of his or her earnings toward college accounts.

Remember, the earlier you put money into an account the more time it has to mature and grow. If you are assessing your savings options, a First Internet Bank Relationship Banker is ready to help. Just give us a call at 1-888-873-3424. For information on tax implications, please speak with your accountant or tax specialist.