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Three great options for education savings plans

College GraduationAccording to CollegeBoard, the average tuition for a private four-year institution was $34,740 for the 2017-2018 school year. As someone who graduated college with no debt, I only think about how thankful I was for my scholarships to cover costs, as well as my parents, who were able to help when they fell short. As I think of this now with my own daughter, I want to do the same for her. I often get asked: “What’s the best way to save for college?” Honestly, it’s different for everyone! I’d like to give you some examples of what is available out there to get you started on your education savings plans. Here in Florida, the two main college savings plans are Florida pre-paid tuition programs and 529 college savings accounts. While they are both quite popular, they are also quite different from each other!

529 college savings plans

College 529 savings accounts are tax free savings vehicles that help pay for college. With 529 savings, you decide how much you want to put into the account and arrange how you want the dollars invested. The return and performance of this investment is NOT guaranteed, but it can allow for much more flexibility. It’s up to you and your financial advisor to make sure you are saving enough to cover tuition and fees. You can use the money to pay for most school-related expenses, nationwide.

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Florida prepaid tuition programs

With a Florida prepaid tuition program, you lock in a plan price with a fixed pay schedule. Such a plan covers tuition and most fees at any public Florida college or university. It may be applied to other schools in the United States, but you may not get full coverage depending on the cost. There is no investment risk involved here, nor do you need to worry about not saving enough — because these plans are guaranteed by the state of Florida. They offer a monthly payment option (from the present until your child turns 18), a 5-year payment option, or a lump sum option. For a newborn today the lump sum is just under $30,000. This would pay for four years of schooling at a university.

Saving for college with a ROTH IRA

But wait… there’s more! One additional option you can consider for college savings is a ROTH IRA. While it’s technically a retirement savings account, it has some characteristics that make it a very helpful college savings tool. In fact, a ROTH IRA may even be better than a 529 savings plan in some cases.

Once you have some funds accumulated in the account over a few years, ROTH IRA withdrawals are 100% tax free. (Well, once you reach age 59 ½ that is; you can expect to be taxed and penalized if you withdraw any time before then.) But there are a few specific rules that allow you to avoid penalties so long as you are utilizing the funds for college expenses. First, you can withdraw up to the amount you’ve contributed (the principal) without taxes or penalties. In addition, you can withdraw the earnings penalty-free (but not tax free) if the money is used for college expenses for you, your spouse, your children, or your grandchildren. This isn’t quite the same tax benefit you can get from a 529 plan. But with a ROTH IRA, you can save the money now for retirement, with the option to use it for college savings for your kids or grandkids.

As you may have already learned, there are LOTS of factors to consider when it comes to college savings plans. The best option is to sit down with a financial advisor to walk you through each of them personally. This can help you find what’s best for you and yours. Our kids are our future — and there are no words to describe the potential they will have if they are able to graduate college with no debt!

June 2019

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