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7 Ways to Save for College

Savings options beyond the Section 529 state plans.

Using a state-sponsored Section 529 savings plan is one of the best options when saving to pay for a college education, but it’s not the only choice.

Depending on your circumstances, one or more of these other savings options may be a good fit with your goals or if you need greater flexibility than a Section 529 plan offers.

1. Section 529 savings accounts or prepaid tuition programs are sponsored by individual states. Contributions are not deductible on your federal tax return, but many states do offer tax benefits. The earnings are not taxed, and the funds must be used to pay for higher education expenses. Any funds left in the account can be transferred to another Section 529 plan beneficiary. This means if child A doesn’t use all the funds or perhaps doesn’t go to college, you can transfer the balance into the Section 529 account for child B. But if the funds are not used for higher education, the distributions are taxed as ordinary income, plus you'll pay a 10 percent penalty.
2. Personal after-tax savings that have been put aside for your child’s education are the most flexible choice. You decide how to invest the funds and how much to contribute. If your child does not end up going to college, you have control over the funds and can use them for another purpose, with no penalty on your withdrawals. The income on these savings is taxable each year.
3. Coverdell Education Savings Accounts/Education IRAs can be used to pay for both secondary education (private school tuition for grades K through 12) as well as higher education expenses. The annual contribution limit of $2,000 per beneficiary is one reason many people skip this choice, but you can certainly open both a Section 529 account and an Education IRA for the same person. There are also income limits that prevent higher income taxpayers from making contributions. If joint filers’ modified adjusted gross income is over $220,000 or $110,000 for all others, no contributions are allowed.
4. U.S. Savings Bonds have always been considered a safe investment choice with a guaranteed return. When redeemed and used to pay for higher education, including qualified technical schools, the difference between the purchase price and the redemption value can be excluded from income under certain circumstances.
5. Trusts for minors can be established for any purpose, including education expenses. Contributions to the trust can be made in the form of other investments you may have as well as cash. A trustee is named and given authority to use the trust income and assets for education expenses, or any other purpose. Earnings on the trust assets are taxed. Depending on how the trust is set up, either the donor can retain the power to recover the trust assets, or the beneficiary gets control of the assets at age 21.
6. Custodianships can be created under a uniform transfer or uniform gifts to minors act. Just like the trust for minors, contributions can be made in the form of cash or in kind, meaning other assets. Earnings are taxed to the beneficiary. The drawback to this option is that the beneficiary gets complete control over the account at age 21.
7. Cash value of life insurance is another source of funds that can be used to pay for education expenses (or any other purpose.) The policy may allow loans or withdrawals of the cash value while the insured parent is still living. If the parent should die, the proceeds from the policy can be used to pay for education expenses.

Please contact our tax professionals at 877.517.6872 to discuss any of these options and how they may fit into your financial plans.