Smarter saving for college
Joel Dresang: Isabelle, the American Institute for Certified Public Accountants came out with research showing that the majority of Americans regret how they have financed college education. You did some articles for our website showing that there are actually lots of options available.
Isabelle Denton: That’s right. Sallie Mae comes out with a survey every year that looks at how America is saving for college, and in that survey for last year they found that most people are actually using general savings accounts to put away for those expenses. And that’s really a shame because there’s a lot of other accounts out there that are designed specifically for saving for a minor or saving for their education that offer much more benefits than just a plain vanilla savings account.
Joel: Let’s talk about some of those accounts. You said the second most popular account after a plain vanilla savings account is the 529 plan?
Isabelle: That’s right. So with a 529 plan, you can put the money in there, invest it how you see fit, and any earnings will grow tax-deferred. When it comes time to take money out, as long as you’re using it for an education expense, the withdrawals are tax-free. On the other hand, if you take the money out and it’s not used for an education expense, you’re on the hook for earnings tax as well as a 10% tax penalty.
Joel: And there are similarities in that 529 plan to what’s called a Coverdell account.
Isabelle: That’s right. A Coverdell account is similar in that earnings grow tax-deferred and withdrawals are tax-free for education expenses. Coverdell has a nice feature that not only can you use it for college expenses, but you can also use it for K-12. Coverdells also have contribution limitations, and it’s also subject to an income limitation of whether you can even make that contribution.
Joel: And some people use custodial accounts. What are those?
Isabelle: Some people do like to use custodial accounts. They’re a little different. You can put the money in, again, invest it. Taxation has a little bit of benefits. For a little while, it’s under the minor’s tax rate and eventually rolls over to the custodian’s tax rate. What’s different is when the child reaches the age of majority, which is either 21 or 25 in Wisconsin, they take over control of the funds so they can take withdrawals as they please from the account at that time.
Joel: And now you have links in your articles to resources with further details on these and other options for saving for college. And you point out that it’s important to see what combination of those options best fit a family’s finances. You also point out that college financing should be taken into account in the larger context of a family’s financial picture.
Isabelle: That’s absolutely right, and people should always keep first and foremost their retirement as their number one saving priority. When you’re saving for college there are other options out there like scholarships, grants, loans and even part-time work. And that’s not things that will be available to you when you’re saving for retirement.
More info
College finance – How to save, by Isabelle Denton College finance – How much to help, by Isabelle Denton
College finance summary, with links to further resources
Isabelle Denton is a registered representative and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
(initially posted June 12, 2015)
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