When a baby is born, one of the first things that family members want to do is begin to save for their education. Many deduce: open a savings account, add money, and upon high school graduation write a check to the respective university. That is one option. However, there may be a better suited plan for you. Kevin L. Crews, Financial Advisor at Raymond James Financial Services in Montclair New Jersey offers the following plans as alternatives for those who want to be more selective.

The 529 College Savings Plan is a state sponsored plan that offers tax-deferred, flexible ways to put money aside for college. “If your child is two-years-old, this plan could be more beneficial than a very conservative CD or fixed income strategy,” says Crews. They offer various market based investment options with higher growth potential than CDs. “This plan is for contributors who deem tax-deferred growth, contribution flexibility, and tax-free qualified withdrawals important factors,” adds Crews. 

Uniform Gifts/Transfers to Minors accounts allow one to transfer ownership of assets to a child without the need to establish a more costly trust. And Life Insurance with a savings component is where one can accumulate dollars on a tax deferred basis. Money can be withdrawn or taken out via a policy loan and may not be subject to tax. “If you use life insurance as a vehicle to help fund college costs, note that there are generally high initial costs in such plans,” says Crews. “Early withdrawals could be penalized due to surrender charges.  Generally, life insurance plans work better if one has a long time horizon.”

Taxable accounts using CDs, bonds, mutual funds, and common stocks are another flexible option. “If your future college student will be attending college in say, two years, an investment in a CD may be appropriate even though the rate is currently low. Reason being, assets are FDIC insured, and you don’t have to worry about losing principal so close to the time that you’ll need the funds. However, CD’s may have penalties if not held to maturity, and investing does involve risk including the loss of principal.”

The Roth IRA and Traditional IRA funds are also options. The 10% penalty that normally applies to withdrawals made before age 59 ½ is waived if the funds are used for qualified education expenses of the account owner, their spouses, or their children or grandchildren. Those funds however, may be subject to taxes on realized gains. “One negative here is that if you withdraw funds from your Roth IRA or Traditional IRA to pay for college, you’ve just reduced the amount of your retirement nest egg,” Says Crews. “Therefore it’s important to review all of your options before deciding to dip into your retirement plan to fund your child’s education.”

A financial advisor can help to explain in detail the options that are available, help to match a college savings strategy to your specific goal, and integrate that in with your financial plan.

Disclaimer: Kevin L. Crews responses are of his own opinion and not necessarily those of Raymond James Financial Services.  His responses are not a complete summary or statement of all available data necessary for making an investment decision, and does not constitute a recommendation, as every investor’s situation is unique.  You should consider your investment goals, risk tolerance and time horizon before making any investment.


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