Trying to save for college for yourself or your kids? Maybe you get extra cash as gifts during the holidays from a benevolent relative and want to put it to good use? Or perhaps you are the benevolent relative and want to give a child a gift that will make a bigger difference than the hottest toy? Before you default to ordering a savings bond, check out all your options. Saving for college can seem like tricky business. However, there are several programs available to help. Check out more details in OSU Extension’s College Saving Options(PDF).
529 Plans: Savings This account allows you to save money for any school in one state (different states have different plans). The best tax advantages are usually found in your home state. Money grows tax free, and you do not pay federal tax on contributions (although you may have to pay state taxes). If the child assigned to this account does not go to college, the funds may be transferred to another child in the family without penalty, or taken back with a 10% penalty on money earned.
529 Plans: Prepaid Tuition This plan allows you to pay today’s tuition rates and save up credits for years down the road when your child attends college (and tuition will be much higher). Ohio does not currently have a 529 Prepaid Tuition plan.
Savings Bonds: I or EE Bonds may be purchased by anyone and can be up to $5000 each year. Sometimes you can exclude interest earned on bonds from taxes if it is used for education. The bad news: bonds must be held for at least five years before cashing to avoid a penalty, and a portion of bonds will be counted in financial aid calculations.
Custodial Bank Account This bank account is set up in the child’s name at any bank or credit union, and you can contribute up to $12,000 each year. The good news: the funds can be rolled into a 529 plan. The bad news: once the child turns 18, she is the owner and can use the funds for anything she wants – school related or not. Also, this money is considered the child’s asset and will count toward the calculations of what she is expected to contribute for financial aid.
Coverdell Education Savings Account (Education IRA) This account is available to those under certain income limitations. Contributions are not tax deductible, but the money you earn is not taxed if used for education. The good news: this money can be used for school expenses from kindergarten to college, so it may be a good choice for those in private school. If the child is the owner, it does not count toward financial aid calculations. If the parent is the owner, financial aid will consider this account an asset.
Personal Investment Account This option offers you lots of control and is available to anyone. However, the deposits are not tax deductible, and you will pay taxes on money earned. These funds are also included in calculations for aid when your child applies to college, raising your assets and making you less eligible for aid. Educate yourself about investing.
Traditional IRA Account This option is available to anyone who is employed. Contributions are tax deductible, and there are no penalties for “loaning” money to yourself for school expenses, like tuition and books. However, you will pay taxes on money withdrawn. Money in an IRA is not counted as part of your assets when financial aid is calculated, making you (and your child) more eligible for help.
401K or 403B Retirement Plans These accounts are available to people who are employed. Some allow you to take a “loan” for educational expenses, but this loan must be repaid and is due if you leave your job. In addition, you’ll pay income taxes on money used to repay your loan, plus again on money you withdraw at retirement. The good news: these plans do not count toward your assets for financial aid calculations.
Saving for college is daunting enough without having lots of confusing options. Take the time to pick the option that will work best for you and your family, and focus on getting money growing faster than your child!
