Harris: College savings plans to consider

By Charlestien Harris

May graduation dates are fast approaching, and many high school seniors are eagerly watching their mailboxes and inboxes for acceptance letters or emails from the colleges they have applied to. 

College acceptance season, which usually runs from mid-March to late April, is also a great time to discuss saving for and paying for college. According to Bankrate.com, the average cost of attending a four-year university is around $35,551 per year and is steadily climbing. Parents, now is the time to learn more about investment and savings strategies to grow those college funds. Some suggestions are listed below.

1. 529 College Savings Plan: A 529 college savings plan is a tax-advantaged investment account designed specifically for education savings. Parents can open a 529 plan and contribute money on behalf of their child, and the money grows tax-free if used for qualified education expenses. A 529 plan can be a state-sponsored investment account with tax advantages that help families save for school. Employer-sponsored 529 plans are tax-advantaged education savings accounts offered to employees through their workplace benefits program. Money in a 529 savings plan can be invested in various assets, such as mutual funds and exchange-traded funds (ETFs). The main advantage of 529 plans is that investment earnings aren’t taxable as long as you use the funds for qualifying education costs. Eligible expenses include tuition, room and board, transportation, or equipment when participating in an apprenticeship or attending a university or trade school.
2. Uniform Transfers to Minors Act (UTMA) Account: A UTMA account is a type of investment account that allows parents to save money for their child’s education while retaining control of the account until the child reaches adulthood. UTMA accounts are designed to help parents or guardians save and invest for a minor child’s future, whether for education, a down payment on a house, or other purposes. Once assets are transferred to a UTMA account, they become the property of the minor and cannot be taken back by the donor. Investment earnings within a UTMA account are generally taxed at the minor’s tax rate, which may be lower than the parents’ or guardian’s tax rate, potentially leading to tax savings. There are no limits on the amount of money that can be contributed to a UTMA account. One disadvantage of having a UTMA account is that the contents are considered assets of the minor and can potentially impact their eligibility for financial aid for college.
3. Coverdell Educational Savings Account (CESA): A CESA is another tax-advantaged investment account that can be used to save for education expenses, including those for elementary and secondary school (K-12) as well as higher education. Parents can contribute up to $2,000 per year per child, and the money grows tax-free if used for qualified education expenses. When used for qualified education expenses, withdrawals from a Coverdell ESA are tax-free at both the federal and state levels. Contributions to a Coverdell ESA are not tax-deductible, but the earnings (interest, dividends, and capital gains) within the account grow tax-deferred. Examples of qualified expenses may include tuition, fees, books, supplies, room and board, and certain special needs services.
4. Roth Individual Retirement Account (IRA): A Roth IRA is a tax-advantaged retirement account designed to help you save for retirement, but funds may also be used for college. Money in a Roth IRA grows tax-free, and you can withdraw funds before retirement without paying an early withdrawal penalty if the money is used to cover education costs for you, your spouse, your children, or your grandchildren. Withdrawing money for college is one of the few reasons you can take money out of a Roth IRA before age 59½ and not incur the 10 percent early withdrawal penalty. However, you do have to pay income tax on account earnings for education-related withdrawals unless the account owner is age 59½ or older. If your children decide not to go to college or you have money remaining after paying for school, you can keep the funds for retirement. Taking money away from your nest egg to pay for a child’s college education could disrupt your retirement plans.
5. Taxable Brokerage Account: A taxable brokerage account is a financial account offered by a brokerage firm that allows investors to buy and sell investments like stocks, bonds, mutual funds, and ETFs. Brokerage accounts don’t offer the tax breaks you would get with education savings accounts, but they provide greater flexibility since there are no contribution or withdrawal restrictions. The advantage of this investment option is that you can deposit as much as you want and take money out of the account for any reason without penalty—but you do have to pay tax on earned interest, capital gains, and dividends.
6. Traditional Savings Account (TSA): A TSA is a common financial product offered by banks and credit unions, designed to hold money and earn interest, offering easy access and FDIC insurance, but typically with lower interest rates than other savings options. Putting money in a traditional savings account that offers a high annual percentage yield (APY) could be a good option for college savings you plan to access in the near term. Today, APYs for high-yield savings accounts range from 3 to 5 percent, which could provide you with a decent return on money you plan to use within the next year or two, or the opportunity to grow money further the longer you let it sit in the account.

The above-mentioned investment options are just a few of the many options you, as a parent or guardian, can choose from to help pay for your child’s education now and in the future. Even grandparents can support their grandchildren financially when it comes to their educational needs. Start early, and you can possibly come out ahead of the game when it comes to paying for future educational needs.

For more information on this or other financial topics, you can email me at Charlestien.Harris@banksouthern.com or call me at 662-624-5776. 

Until next week – stay financially fit!

Charlestien Harris is our financial contributor, a financial expert with Southern Bancorp Community Partners whose articles are seen in a number of publications around the region.