What's the best way to make sure we have the cost of college covered? Savings, a 529 plan, or something else?

I want to make sure I am ready for my son's college funds. He's 11 now.

Asked by Amanda

1 Answer

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Answered by David Meyers, Financial Adviser in Palo Alto, CA
It can be complicated, and it's nearly impossible to really factor in, this early on (I know - it doesn't seem early) how much you'll eventually actually pay, how much you may get in grants and/or loans, etc. How much aid you may get will ultimately depend on a whole variety of factors including how many kids you have in school, your income, any income the kids have, how much you have saved in a variety of savings vehicles, etc.

One thing I strongly recommend you consider, though, is that if you're not already maxing out all retirement savings options, do that first. Money saved in retirement plans generally is there for a much longer time horizon, so you can really take advantage of that time for growth and compounding; Money in retirement plans (IRAs, 401k, etc.) is generally not considered to be available at all for college when they financial aid computations are done, whereas money saved for college either in a 529 plan or in a regular taxable account will be factored in and may lead to less financial aid.

That all said, there are arguments for both regular taxable savings and for 529 plans. Money in the 529 plan will grow tax-free if the funds are used for college. However, if the money is not used for college, and you pull the money out to use for anything else, the growth may be subject to both taxes and penalties. So if you use a 529 plan, don't overfund it (though if one kid doesn't use the money in the 529 plan, it may be used for another kid - or other family member - for education).

It may be worth consulting with a financial planning professional - there are some who work by the hour, and there are some who specialize in college planning in particular - to be able to present a more complete view of your situation, review options both in savings vehicles and potential future college costs (and the impact of different types of savings on potential financial aid).

One last thing - a generation or two ago, it was not uncommon for folks to use Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts to save money in the kids' names (for tax reasons - so income/growth was taxed at the kids' rate rather than the parents' rate). Some folks still remember their parents using such funds to save for college. Nowadays, it's very rare for a UTMA/UGMA account to make sense for that, since there are much better options with both better features for parental control, as well as better impacts on future potential financial aid. | 10.21.15 @ 00:56
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