College Savings Vehicles

The current cost of a UMass Amherst education is more than $30,000 annually.  Boston College tuition is more than $80,000 annually!  It can be overwhelming to think about this, and quite easy to procrastinate on getting started.  I encourage clients to start sooner than later.  You can start a college fund with as little as $1,000 or $100 per month.  Start something today, and then slowly increase savings each year as your cash flow allows.  This approach can take a significant dent out of college costs. 

529 Plans
The most popular (and often the best) vehicle for college savings is a 529 Plan.  Money invested in a 529 plan grows TAX FREE if it is utilized for qualified education expenses.  This can make a huge impact if your children are young.  For example, if you invest $10,000 when your child is 3 years old, and it grows at an 8% return, you would have over $30,000 of tax-free funds when s/he is 18 years old.   

529 plans can be used at most certified educational institutions, such as colleges, trade schools, graduate schools, etc.  There is no limit on what can be withdrawn from a 529 plan for higher education.  529 funds can also be used for private Kindergarten through Grade 12 education, but you are limited to $10,000 annually.

The major downside of a 529 plan is that all of it must be used for education expenses.  If not, you need to pay taxes on the growth PLUS a 10% penalty!  There is flexibility regarding for whom the 529 plan can be used.  For example, if you have plans for your two children and one of them does not go to college, the accounts can be consolidated for the child attending college.  You can also use the funds for education of yourself, your nephew, your grandchild, etc.  Congress recently passed new legislation (SECURE 2.0 Act) that allows up to $35,000 of unused money to be moved into a Roth IRA. 

Roth IRA
Roth IRAs are excellent and flexible vehicles that can be used to purchase real estate, finance college and fund your retirement.  You are generally able to withdraw the amount that you invest in a Roth IRA for any reason, without incurring taxes or penalties.  For example, if you contributed $20,000 and it grew to $30,000, you can generally pull the $20,000 out for any purpose.  Up to $10,000 of growth can be used to purchase qualified real estate.  Any of the earnings can be used to pay college costs.  If you are using earnings for a home purchase or college expenses, you need to pay income taxes on the growth, but there is no penalty.  If you let your Roth IRA grow until you are 59 ½, you can withdraw the growth tax-free!  I love Roth IRAs because they have these cool features and can serve multiple purposes.  There are income limits to be able to contribute to a Roth IRA, as well as contribution limits.  Higher income earners are sometimes able to do a “Back Door Roth.”  This strategy is a bit too complex for the scope of this article, but something to discuss with your financial advisor.

UTMA Accounts
Uniform Transfers to Minor Act (UTMA) Accounts used to be popular, but are rarely used these days.  There are two primary disadvantages of UTMAs.  First and foremost, if your child qualifies for financial aid, money held in UTMAs can hinder aid your child might receive.  Secondly, when your child turns 21, the money legally becomes theirs.  A portion of the earnings are not taxed, and a portion of the earnings are taxed at your child’s tax bracket.

Lars Lambrecht, Rehoboth resident and Certified Financial Planner, is available to answer questions or meet for a consultation.  617-947-6428