By: Mary E. McCraw, CFP®

Recently, I wrote about financially preparing for a new baby.  While those early days of baby gear and diapers are certainly expensive, they pale in comparison to the looming cost of college.  Here are some things to consider:

When to start?
The earlier you can start setting aside money, the better.  Even a small amount can increase significantly when saved over 18 years.  As an example, if you start saving $50 per month for a newborn (earning 6%), that would grow to over $19,000 vs. a little less than $12,000 if you started at age 5.

How much to save?
There are many calculators available online to help with estimates or seek the advice of your financial advisor.  For those do-it-yourselfers, www.savingsforcollege.com has several good resources.  Here are some important factors when setting a target amount:

• Which college?  Consider the type of college education you want to fund: public vs. private, in-state vs. out of state.  How many years do you want to fund – just undergraduate or graduate/professional degrees as well?
• Philosophy – Do you want to pay 100% of all costs for your children or do you want them to have some “skin in the game”?  Is there a specific dollar amount you would like to cover each year?
• Other resources – Realistically think about what resources may be available for college costs: paying out of pocket (especially true if you will be paying private high school tuition), gifts from family, part-time work by the student, scholarships, grants, other financial aid and tax benefits.

Where to save?
The accounts below are designed specifically for college savings with certain tax benefits (if you qualify).  However, along with the benefits come restrictions on withdrawals.

• 529 Plans – Withdrawals are tax-free when used for qualified college expenses, can be transferred between family members and may qualify for state tax benefits.
• Coverdell Education Savings Accounts – Lower annual contribution limits than 529 plans, the ability to contribute is limited based on income and using for K-12 expenses is allowed without penalty.
• Qualifying U.S. Savings Bonds – Interest can be excluded from taxable income if used for tuition and fees, but this benefit is phased out based on income.
• Roth IRA/Traditional IRA – The 10% early withdrawal penalty can be avoided if used for college expenses. Traditional IRA withdrawals are still taxable, but Roth IRA withdrawals can be tax free under certain circumstances.

While the tax benefits of the preceding accounts are attractive, we generally recommend having some savings in an account without restrictions on how the money is used.  The following accounts do not have such restrictions, providing some flexibility in the overall plan.  Keep in mind that a child gets control of funds in a UTMA/UGMA at a certain age so it is not the right fit for every circumstance.

• UGMA/UTMA  – Account in child’s name and taxed at their bracket, but child gets control of funds at age of majority (varies by state).
• Investment Account (in parents name)  – A flexible option allowing the parents to maintain control and funds not used can be saved for retirement.

The right mix of these accounts will be different for everyone and will depend on your goals, situation and tax bracket.

This is just a short list to get you started thinking about college savings.  Get a jump on it by starting early and saving consistently.

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