Exploring Alternative Ways to Save for College Beyond the 529 Plan
The recent Wharton study on 529 college savings plans revealed that a significant number of people have invested in suboptimal plans. These plans involve 8.9 million accounts and billions of dollars.
“The cost of higher education has been steadily rising over the years, causing many families to seek out creative and effective ways to save for their children’s college education,” says David Beckerman Senior Vice President Investments David Lerner Associates. “While the 529 plan has been a popular choice for its tax advantages and flexibility, there are alternative methods worth considering. These choices can complement or replace the traditional 529 plan.”
Let’s have a look at some of these alternatives and their potential benefits.
Custodial Accounts (UTMA/UGMA):
Custodial accounts, such as Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA), are investment accounts managed by an adult on behalf of a minor.
Although the funds are usually designated for education, there is no obligation to exclusively use the funds for educational expenses.
One of the drawbacks of custodial accounts is that once the child reaches the age of majority (usually 18 or 21, depending on the state), they gain full control of the account and can use the funds as they see fit.
Roth IRA:
Although Roth IRAs are primarily known as retirement accounts, they can also be used to save for college. If you use money from a Roth IRA for education, you won’t face any penalties or taxes. This applies even if you’re not retired yet.
This flexibility can be advantageous if a child decides not to pursue higher education.
Coverdell Education Savings Account (ESA):
Coverdell ESAs are tax-advantaged accounts specifically designed for educational expenses. Contributions are not tax-deductible, but earnings and withdrawals for qualified education expenses are tax-free. Coverdell ESAs allow for the use of funds for both K-12 education expenses and higher education costs, unlike 529 plans.
Taxable Investment Accounts:
While taxable investment accounts lack the tax advantages of accounts like the 529 plan, they offer greater flexibility in terms of usage. The funds can be used for any purpose, including college expenses. Additionally, capital gains taxes may be lower for students who fall within lower income brackets.
529 Prepaid Tuition Plans:
Different from traditional 529 savings plans, prepaid tuition plans allow families to lock in today’s tuition rates for future education. These plans may be offered by specific states and educational institutions and can provide a hedge against rising tuition costs.
Education-Focused Savings Accounts:
Some financial institutions offer specialized savings accounts tailored to educational expenses. These accounts often come with higher interest rates and incentives for savers who commit to regular contributions. Researching these options could yield a more tailored approach to college savings.
Peer-to-Peer Gifting Platforms:
There are online platforms that allow friends and family to contribute directly to a student’s college fund. These platforms can be a creative way to engage loved ones in the college savings journey and make a meaningful impact on a student’s education.
529 Plan Alternatives in Action:
The rising costs of higher education have compelled families to explore innovative ways to save for college beyond the 529 plan. An increasing number of families are exploring these alternative methods to supplement or replace the traditional 529 plan.
Consider the pros and cons of each option before deciding, as they all have benefits and risks. Families should evaluate their financial goals and risk tolerance. Speak to an investment counselor near you to find the best option for your family.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.