Choosing a College Savings Plan

Saving for your child's college education is a task best started as early as possible. Time is on your side if you start saving while your child is still in diapers, but you still need to make the right decisions as to which savings vehicle to use.

Start Saving

With so many options available for saving for college, it's important for parents to examine all the options and decide which works best for them. While some college savings plans offer potential tax advantages, others are designed specifically for flexibility when the time comes to access the account.

Jeffrey Brice
Jeffrey Brice

Jeffrey Brice, CEO of TrustEgg, stresses that it's important to start saving early. "Even if a family doesn't have a lot of money, they can invest $5 a month and they won't really feel it," he says. "Over time, they can increase that to $10 or $20 a month, and then that can really grow."

Brice advises parents to not feel overwhelmed by the prospect of saving for college. He says, "People think saving for a child's education is overwhelming. They say, 'How are we going to save $50,000?' That shouldn't be the mindset; it should be, 'How are we going to start saving now?'" Brice explains, "That's what we really want to get across to everyone. Just get started and save what you can."

UTMA Trust Accounts

A UTMA (Uniform Transfer to Minors Act) account is a trust fund that holds the funds within the account until the minor who's name appears on the account reaches the age of 18.

Brice suggests starting the process of saving for college with a trust fund. These accounts allow anyone to contribute to the account in the child's name. The child gains access to the funds in the account upon reaching age 18. Until then, the money is held in a custodial account.

The advantages to these types of accounts include:

  • Anyone can contribute to the account at any time; TrustEgg even provides tools for parents to invite family and friends to contribute through social media.
  • The funds in the account can be used for education, but they can also be used for any other purposes.

"When a child turns 18 they aren't necessarily going to college," says Brice. However, they will still need money. "When they leave home, this makes for an easier transition. There are other expenses outside of college."

There may be tax advantages to these types of accounts. Says Brice, "What most families don't know about is the Kiddie Tax Exemption. Every year a child can receive $1,000 of investment income for free."'

"Saving is the key and it's not just one option or the other," he says. "Saving for college is important, but having the flexibility to use your savings to start a business, make a down payment on a house, or whatever other expenses a young adult may have is also important."

529 Plans

Brice suggests that starting with a trust account is a great idea, then move on to other options. "As a complement to the savings account, you can move to a 529 as the child grows," he says. Both state-specific prepaid tuition plans and savings plans are available that fall under the umbrella of 529 plans. These investment accounts are tax-deferred while they grow and are earmarked specifically for educational expenses.

Prepaid tuition plans can be a good idea for parents who are confident that their children will attend college within a specific state. Find out if your state offers a prepaid tuition plan using the list on CollegeSavings.org.

Additionally, 529 savings plans are best for parents who have a long period of time to save and who will not panic over market fluctuations since these accounts are market investments. Start your search for an appropriate 529 savings plan through your preferred financial provider or through a company like Vanguard.

Coverdell

Coverdell Education Savings Accounts grow tax-free and the funds are distributed tax-free as long as the money is used for school expenses prior to the student turning 30 years old. Any funds not used for educational expenses (or distributed after age 30) will be subject to taxes and additional fees, although there is an option to roll funds into another Coverdell account for another eligible individual.

These accounts are best for parents who do not have a significant amount of money to contribute annually. This is because there is a $2,000 annual limit to contributions. Check with your financial institution to find out if Coverdell accounts are available, or consult with another credible provider offering these accounts like Edward Jones.

Ready, Set, Save!

It's never too early to begin saving for your child's college education. The earlier you start, the more you can take advantage of compound interest and potentially have a significant amount of money at the ready for your child's future. To find out which specific options are best for your college savings plan, speak to a financial advisor.

Howard Love, the CEO of LoveToKnow, has a venture investment in TrustEgg.

Choosing a College Savings Plan