So Many College Savings Options, Which One Should You Choose
Having all this information on the various savings plans is great but what do you do with it? Here is our recommendation on how you should approach the long-term financing of your students education.
A Possible Approach for Long-Term College Savings
- Open an Individual Retirement Account
- Consider a Coverdell Education Savings Plan
- Open a 529 College Savings Plan
Open an Individual Retirement Account
The first option we recommend when looking at long-term college savings plans is the tried and true Individual Retirement Account (IRA). If you are not currently using an IRA as part of your retirement planning, then establishing one now to pay for college is a good way to go. There are two real advantages of using an IRA for college. First, if you withdraw money early from your IRA to pay for college expenses for yourself or dependent, you do not have to pay early withdrawal penalties as long as the distribution does not exceed the education expenses. Second, funds in your IRA currently do not have to be reported as an asset in your FAFSA so they do not increase your EFC. Again, only use the IRA option for college funding if you ARE NOT relying on it for your retirement. Your students will have a lot of time to save for their retirement; don’t sacrifice yours for their college education.
Consider a Coverdell Education Savings Plan
If you still have money you’d like to save for education after you have maxed out your IRA contributions, fund a Coverdell Education Savings Account. Again, these college savings plans are self-directed and can be used for either primary or college education. So if you open this plan and then decide to send you student to private primary school, you can tap these funds to help pay for that expense.
Open a 529 College Savings Plan
We don’t list the 529 College Savings Plan as the third option because it is bad. On the contrary, there are many positive things about the plans which make them attractive. However, because these college savings plans are occasionally less flexible than other investments and due to the negative impact they can have on your Expected Family Contribution, we recommend you consider the other available options first. If you do open a 529 College Savings Plan, remember that if it is at all possible, we highly recommend opening the plan with your student’s grandparents, great-grandparents or other relatives listed as the owner. The impact on your potential financial aid could be huge.