Navigating The College Savings Programs

Navigating The College Savings Programs



Navigating the​ College Savings Programs
As a​ parent, the​ big financial concern with a​ newborn is​ how to​ set aside enough money to​ assist for​ a​ college education .​
Universities and​ state governments have developed many different financial savings plans to​ encourage parents to​ save money for​ college .​
Some of​ the​ plans include 529 accounts, Coverdell accounts, Roth IRAs and​ prepaid/guaranteed tuition costs .​
Unfortunately, few of​ the​ programs offer every benefit such as​ tax deductions, tax deferred savings, unlimited investment options, self directed investments and​ no penalties.
Selecting a​ university is​ a​ critical and​ expensive decision, and​ in​ my view it​ is​ foolhardy to​ make before the​ last couple years of​ high school .​
a​ drawback of​ the​ university-based or​ state-based plans (such as​ a​ 529 account) is​ that they impose penalties if​ a​ child doesn’t attend a​ specific university or​ in​ a​ specific state .​
Who knows what aptitudes, skills or​ interests your child may develop that necessitate a​ specific school that is​ out of​ your home state .​
University and​ state-based plans also impose penalties if​ the​ money isn’t ultimately used for​ qualified college expenses; another example where an​ event that is​ out of​ your control and​ may cause an​ unneeded expense .​
But the​ biggest problem with university and​ state programs are the​ financial rule changes they make – after you start the​ plan.
To me, the​ university and​ state-based programs are a​ lose/lose savings plan for​ parents .​
If the​ cost of​ tuition rises faster than forecasted, in​ spite their guarantees, they raise the​ price and​ leave you under-funded .​
Conversely, if​ tuition rises less than forecasted, then you end up overpaying for​ tuition .​
And the​ same applies to​ the​ stock market some plans force you to​ invest in; when the​ market fell in​ 2000 and​ 2001, many plans broke their promise to​ guarantee full tuition funding in​ spite of​ promises to​ the​ contrary.
Another drawback of​ state-based plans is​ that your investment options are severely limited to​ a​ few mutual funds run by the​ brokerage firm operating the​ account .​
I​ have evaluated several: and​ they have high fees and​ poor returns, and​ I’m wary of​ the​ lack of​ competition for​ many of​ these accounts .​
The brokerage firms blame economics for​ the​ lack of​ investment choices, saying that most of​ the​ accounts are small and​ not very profitable for​ them, so they want as​ little trading and​ customer interaction as​ possible.
The federal college savings plans are better because they allow the​ widest selection of​ investments (such as​ an​ educational Roth IRA or​ other education savings accounts), and​ can be applied to​ most any accredited university .​
These accounts offer tax-free growth and​ withdrawal is​ also exempt from federal taxes and​ some states taxes .​
Realistically, your situation may call for​ multiple accounts .​
Rules prohibit you from using these if​ your income passes certain thresholds.
In my opinion, the​ best place to​ start saving college is​ with U.S .​
government ibonds from TreasuryDirect.gov .​
These bonds offer the​ most flexibility and​ control, and​ require none of​ the​ paperwork and​ rules of​ other savings plans .​
They accrue a​ decent rate of​ interest every month, the​ principal is​ adjusted for​ inflation each quarter, the​ income tax is​ deferred, and​ you don’t have any brokerage fees .​
And when the​ money is​ withdrawn for​ a​ university on their approved list, the​ money can be redeemed tax-free .​
(As for​ limiting rules: you cannot withdraw the​ money in​ the​ first year, and​ if​ you withdraw it​ within five years, there is​ a​ three month interest penalty – so ibonds are not the​ best savings plan after a​ child reaches about age twelve) .​
Since ibonds are simply savings not an​ educational account, the​ money can be spent for​ any type of​ expense that may arise.
The government and​ brokerage firms keep updating these accounts, so my complaints will hopefully become moot in​ the​ near future .​
But the​ criteria that you need to​ watch for​ are: many investment options, few penalties, no taxes and​ total control .​
These will maximize the​ money you’re setting aside for​ that expensive degree.




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