College Financing / Financial Planning

Exploring Your Options: Choosing the Best College Savings Plan

Published by Bob Gustafson

Exploring Your Options: Choosing the Best College Savings Plan

It’s no secret college is expensive. It can be overwhelming to think about tuition as a lump sum because it’s intimidating. But finding the best college savings plan is a crucial step towards securing your child’s educational journey. With the rising costs of tuition and other expenses, it’s never too early to start planning for the future.

The best strategy for college savings is to focus on saving small amounts of money over a long period of time for your child’s college education. Then, as your child grows older, you can save greater amounts of money. Too many people are using their retirement savings to fund their children’s college tuition bills. And that’s never a good idea! Remember once out of college, your kids have their whole lives ahead of them to pay off loans. But if you jeopardize your retirement savings for their college fund, you’ll risk having to dig out of debt and working much longer than you anticipated.

College Savings Plan Options

Now that we know the ideal situation is to start saving early, a follow-on question arises: where should I put the money? The best options out there are the ones that provide tax deferred benefits. There are two ways to do this. You can use the Coverdell education savings account or the 529 plan. As with all of our discussions, most of our advice is predicated on your unique financial situation. This topic is no different. However, for most people, the 529 plan is the better option of the two. Read below to learn more.

Coverdell Education Savings Account

The Coverdell education savings account is a trust or custodial account that allows you to save and grow your money tax-deferred for educational purposes, including certain qualified K-12 expenses. But this option is only available to you if your income is less than around two hundred thousand per year (married filing jointly) or about hundred thousand per year (if you are single). In addition, you’re also limited in how much you can put into the account. And if your child does not use this money for college, it will eventually be distributed to your child, not you.

The upside to this option is your investment options aren’t limited in any way. You’ll see below that the 529 plan investment options are not as robust.

529 plan

In contrast to the Coverdell education savings account, there aren’t any income restrictions with the 529 plan. While there is a limit to how much you can put into it annually, it’s much more than the alternative. In addition, as long as you use the money withdrawn from a 529 plan for qualified educational expenses, the gains made on the money are tax free.

Another perk of the 529 plan is that the “qualified education expenses” have gotten more liberal. You can now use the money i.e., up to ten thousand per year for K-12 tuition at private schools. Beginning in 2024, you can also roll over “left over 529 plan money” into Roth IRAs (subject to certain limits and restrictions). Or you can leave the money in there and let it grow for your grandchildren.

The only downside to the 529 plan is the investment choices. They’re not nearly as robust as a traditional investment account or the Coverdell education savings account. However, the benefits of the 529 plan far outweigh this downside making it the best option for the majority of people.

Education savings plans are more than just financial investments. They are an investment in your child’s future. Take the time to assess your options and make a plan that aligns with your goals and resources. And contact an expert today to help you with this and other financial planning needs.