College Savings Plans You Can Set Up For Your Kids

American Investment Planners LLC

500 North Broadway, Suite 260, Jericho, NY 11753

(516) 932-5130 / (866) 932-5130

Before their child is even born, many parents are already starting to think about college and what they'll need to do over the next several years to prepare financially - and with good reason (the average cost of just one year's worth of college tuition and fees PLUS room and board for an in-state student at a public university is over $19,000, with private schools recording an average of about $44,000). 

Although this may seem overwhelming, there's some good news - there are a few different types of college savings plans that parents can set up for their children so that when it's time to enroll, they already have some of the funds needed to cover the cost. Here are a few of the most popular accounts:

529 College Savings Plans
Think of a 529 plan as something similar to a 401(k) or IRA - they are designed for parents to save for their child's education on a tax-free basis. Although you contribute after-tax dollars, the money in the account itself grows tax free, AND there are no taxes on the distribution of funds so long as it is used for education expenses that qualify (tuition, books, fees, room and board, and school supplies). 

Something else that may seem appealing to parents here is that the funds belong to the parent, not the child, even though the money will likely be used by the child. In the event that the child decides they aren't going to pursue a college education, the parent is able to change the beneficiary on the account so that they can be sure the money is eventually used for educational purposes.

Coverdell Education Savings Accounts
Similar to a 529 plan, after-tax dollars are used initially, but the money within the account grows on a tax-free basis. Additionally, so long as the money is used for educational expenses, no taxes are applied when it is taken out. This type of account offers very flexible investment choices, and unlike a 529 plan where investments can only be changed twice per year, with a Coverdell savings account, changes can be made as often as needed/wanted. 

One thing to note about this type of plan is that once the child turns 18, they officially take control. That said, there is a chance that the money won't necessarily go to college expenses should that be what they decide.

UGMA and UTMA Accounts
UGMA is short for the Uniform Gift to Minors Act, and UTMA is short for Uniform Transfer to Minors Act. Although the funds in these accounts can be used by the child in any way (so not just for college, though that is certainly an option), some people prefer these accounts since they know that the money is at least going to directly benefit the child somehow. If, as a parent, you want to be sure that the money you save does go directly to education expenses, then you may want to choose a more controlled option, such as a 529 plan.

Note: something to keep in mind with these accounts is that since the assets are in the child's name, it could impact their ability to receive financial aid.

Like anything else, deciding on a college savings plan for your child in particular will all depend on your current financial situation and future goals. The best way to figure out which type of account is best to pursue is to speak with a financial planner who understands your circumstances, investment philosophy and long and short term goals! If you are currently without one, turn to us for help.

For more information about how we at American Investment Planners LLC can help you and your family prepare for your child's college, give us a call at (516) 932-5130 or email info@americaninvestmentplanners.com.