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How to Save for College

How to Save for College

The prices of college tuition have steadily been increasing every year.  According to The College Board’s statistics tuition of a four year public college has risen on average by 3.5% beyond inflation every year for the past 10 years.  The Board indicates that the national average cost of tuition and fees at a public college for the school year of 2014-2015 was $9,139 for state residents while the average cost of room and board was $9,804.  Add in the amount paid for books and school supplies and the average cost of a school year as an in-state public school student is right at $20,000.  The average cost of attending school out-of-state or attending a private school is of course much higher.

So how are you going to pay for your kids’ college?  The best advice is to START SAVING NOW.  Here are 5 good college savings options:

1) 529 Plans:  The savings in these plans grow tax-free and there are no tax on withdrawals if they are used for qualified college expenses (tuition, fees, room and board).  The plans have no income limits and have high limits on contributions (contribution limits vary by state).  Many states give tax deductions or credits for contributions.  If you withdraw for other reasons than education, you pay a 10% penalty on plan earnings and may possibly have to pay back any state tax deduction taken.  The plans are portable which means you can roll your savings over to another state’s plan without penalty after 12 months.  You can also change the beneficiary of the plan to one of your other children, yourself, or another relative.

2) Prepaid Tuition Plans:  These plans offer the same tax benefits and have the same tax penalties as the 529 plans.  They can be used for colleges in-state and also some private schools.  You pay into the plan years ahead of your child’s college years.  The plans will lock you in at a rate of tuition and the college tuition bills are guaranteed to be covered regardless of inflation.  If the student’s plans change about studying in-state, you can transfer the money out of the account.

3) Coverdell Education Savings Accounts:  These accounts have similar benefits and tax penalties to the 529 plans.  However, the contribution limit per child is $2,000 a year.  There are adjusted gross income limits for eligibility purposes ($110,000 if single and $220,000 if married filing jointly).  One benefit is that you can also use the plans to pay for both private elementary and high school tuition.

4) Roth IRAs:  Withdrawals that don’t exceed your contributions can be withdrawn at any time tax-free and penalty-free.  Earnings can be withdrawn penalty-free if used to pay college expenses, but income tax would be assessed if parents are under age of 59 ½.   Each tax payer can contribute up to $5,500 each to the Roth annually ($6,500 if older than 50).  There are adjusted gross income limitations for contributions ($131,000 for singles and $193,000 for married filing jointly in 2015).

5) Custodial Accounts or UGMAs (Uniform Gifts to Minors Act): These are trust accounts set up for a child and managed by a trustee until the child reaches 18 or 21 years old depending on the state.  The money doesn’t have to be used for college. You can give up to $14,000 a year to each child without incurring gift tax.

Don’t despair if you think you’re not able to set aside enough money to pay for all your kids’ college expenses.  Even some college savings, especially when started early, can go a long way.  There are always scholarships, financial aid, and student loans available to bridge the gap.


Allen & Company, PC  - a CPA firm serving Kennesaw, Marietta, Acworth, Woodstock and north Atlanta.  Providing accounting, financial statement audit, taxation, and advisory services for individuals and businesses.  Extensive experience working with franchised restaurants and other franchised businesses.