If you have children or grandchildren who’ll be heading off to college, it’s important to understand what those four years are likely to cost you. By 2020, it could be as much as $250,000 for a private institution and $130,000 for a public institution. So besides winning the lottery, what saving plans are available?
529s: State sponsored investment accounts. The money grows tax-deferred and is tax-free when withdrawn to pay for qualified expenses. For families with multiple children, funds can be moved from one 529 to another, depending on which kid can use the money more.
Coverdell Accounts: Like the 529s, allows earnings to grow tax-deferred and is tax-free when used to pay for qualified expenses. One drawback is now you can only give up to $2000 per year.
US Savings Bonds: If purchased after 1989, can be redeemed tax-free when the bond owner uses the proceeds to pay college tuition and fees. US Savings Bonds are very safe investments but tend to offer lower rates of return than either 529s or Coverdell’s.
Custodial Accounts: Are opened in the child’s name and the income is taxed at the child’s rate and not the parent’s rate.
- Start saving as early as possible. I opened 529s when my kids were six months old.
- Set up automatic deposits so you don’t have to think about it.
- Rather than giving gifts on birthdays, ask friends and relatives to give to your kids’ college savings plan instead.