William Lako: Pieces of the college planning puzzle

Imagine your child’s college future hinges on your decision, and you’re suffering from analysis paralysis because you have too many options to choose from. Unfortunately, that situation rings true for 44% of parents surveyed in the most recent College Savings Survey—they haven’t started saving for their children’s higher education because they simply don’t have time to research their options. Like all savings, it’s best to save early and often, so invested savings have time to grow. However, it’s most important to continue to save for your retirement. While there are scholarships, grants, and loans for education, there are no loans to fund your retirement.

The most common college savings account is a 529 plan. These state-sponsored, tax-advantaged savings accounts were specifically designed for families to save for educational expenses. The savings grow tax-deferred, and withdrawals used for qualified education expenses are made tax-free. Some states even offer a state tax benefit for residents. Furthermore, all 529 plans accept third-party contributions, meaning anyone, including grandparents, aunts, uncles, or even friends, can help a child save for college. These plans also do not have an annual contribution limit; however, contributions up to $16,000 per individual qualify for the gift tax exclusion. 529 plans also have a broad definition of qualifying expenses, the ability to transfer between beneficiaries within the same family, and explicit account control ensuring funds are used for the intended purpose.

Along the same lines as 529 plans are Coverdell Education Savings Accounts; however, these accounts have income limits and considerably lower maximum contribution limits. At one time, only Coverdell ESAs could be used for K-12 expenses, but the 2017 Tax Cuts and Jobs Act expanded 529 plan benefits to include tax-free withdrawals for private, public, or religious elementary, middle, and high school tuition.

Custodial accounts are brokerage accounts generally held by the parent and then transferred to the child when they reach the age of majority. While a brokerage account is not limited in investment options, the money belongs to the child and can be spent at their discretion once they control the account—which may or may not include college expenses.

Some families may consider a Roth IRA for college savings because any money not used for education expenses can remain in the Roth IRA, growing tax free for your retirement. If you are only able to save up to $6,000 a year for your retirement and your child’s education, your assets may be able to grow faster if combined. You may withdraw contributions at any time, so growth can remain in the account and provide you with tax-free retirement income.

When savings alone are not enough, most students opt for student loans. Federal and private student loans have made college attainable for many people who might not otherwise be able to afford it. Before you or your child accepts a loan, it’s important to understand you’re not just paying back the amount you borrow, you’re paying back interest as well, and that will add a substantial amount to the total amount you pay.

Your child’s college tuition is easily one of the largest expenditures a family will ever make. If you have more than one child, the financial commitment is even greater. Even if saving for college seems overwhelming now, with proper planning, college can be within your reach.