Once you’ve made the decision to save for your child’s future college expenses, your next step is to research the most appropriate savings vehicle for your situation. Some of the more popular savings vehicles you can use include 529 Plans, Coverdell Education Savings Accounts, custodial accounts, or Roth IRAs. While each type of account has its advantages, I highly recommend saving to an account specifically for education. Many education accounts offer tax savings and high contribution limits.
529 Plans are the preferred option among financial experts. Contributions grow tax free, and withdrawals used to pay qualified higher education costs are federally tax free. In Georgia, residents may also take a state tax deduction up to $2,000 for contributions — a win-win where taxes are concerned. Georgia’s Path2College 529 Plan does not have an annual contribution limit; however, contributions may be subject to gifting rules. While money in 529 Plans are considered when calculating federal financial aid eligibility, they are favorably assessed as parent assets up to 5.64 percent, unlike student assets, which are assessed at 20 percent. Furthermore, 529 Plans have provisions to account for situations where the student receives a scholarship or chooses not to attend college.
Coverdell Education Savings Accounts also offer tax free growth and withdrawals for education expenses; however, contributions are capped at $2,000 per year per beneficiary, regardless of how many accounts the beneficiary has. Coverdell ESAs offer greater flexibility in investment options as most are self-directed, similar to an IRA. Additionally, funds may be used for elementary and secondary school expenses, so this may be of interest if you are considering a public, private or religious school requiring tuition. While Coverdell ESAs are on equal footing with 529 Plans in the financial aid calculation, there are drawbacks. First, your modified adjusted gross income must be less than $220,000 for married filing jointly to be eligible to establish an account. Additionally, your contributions are not revocable and funds will eventually belong to the beneficiary.
Speaking of irrevocable gifts, custodial accounts can be used for college savings, but once the child reaches the age of majority, the assets in the account become the sole possession of the child and he or she can use the assets any way he or she sees fit. While Georgia’s age of majority for custodial accounts is 21, you should consider how financially responsible some 21-year-old college students may or may not be. Responsibility aside, custodial accounts are considered student assets and count heavily against financial aid eligibility.
While you do not want to use a Roth IRA account as your primary source of education funds, a Roth IRA may be considered if you are trying to save for college and retirement. Because Roth IRAs are intended for retirement savings, you are under no obligation to use these funds for college expenses. However, if you choose to do so, the early withdrawal penalty is waived when used for higher education expenses.
This is a very brief overview of some of the accounts you can use to save for college.
Before establishing an account for college savings, talk with your financial adviser
about your situation to help ensure you get the most benefit from your savings.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.
