How to Choose a College Savings Plan
Published March 1, 2013 | Updated April 3, 2013
There are no guarantees that a degree will get you or your child your dream job, but the cost of college tuition may be an investment in a better future.
It's a sizeable investment. Over the past few years the increase in college tuition has outpaced inflation. On November 13, 2014, USA Today reported that the average cost of a 4-year college education for the 2014- 2015 school year rose to an average of $18,943 for in-state college or university tuition and $32,762 for out-of-state college or university tuition. That does not include room and board, textbooks and supplies, or meal plans. While you can hope for scholarships, a good college savings plan is a better guarantee that you or your children will be able to attend the school you choose.
Here is an overview of requirements, risk levels, and tax advantages of two ways to save for college.
Coverdell Education Savings Accounts (CESA)
Anyone can contribute to a beneficiary's CESA. The amount they may contribute depends on their Modified Adjusted Gross Income, and total contributions from all sources cannot exceed $2,000 per beneficiary per year.
Contributions to a CESA are not tax-deductible. A CESA can be used to save for tuition at either a public or private school. Funds can be used, tax-free, to pay for qualified education expenses such as tuition and fees, textbooks, and room and board. Funds which are used for non-education expenses are subject to a 10% penalty and treated as regular taxable income to the beneficiary.
The beneficiary must use the funds in their CESA by age 30. Should they choose not to, certain eligible family members can be designated as the beneficiary.
A CESA lets you choose how the money is invested. You can spread it across stocks, mutual funds, share certificates, and share accounts to match risk vs. return ratio you feel comfortable with. Be sure to watch for fees that come with some investments as these can diminish the account's growth.
529 Plans are also referred to as Qualified Tuition Programs. There are no income limitations for contributing to 529 Plans, and the maximum amounts that may be contributed per beneficiary are fairly high. The account remains in the contributor's name, so it has less of an effect on a student's ability to qualify for financial aid than some other college savings options. The beneficiary of the 529 Plan can be changed easily, and doesn't require a transfer of the account.
Funds can be used only for higher education expenses, such as tuition, books, and room and board. Generally, a 10% penalty must be paid if funds are used for non-education purposes, however there are some exceptions which can be found in this IRS publication.
You can choose from a menu of investments in professionally-managed portfolios. The investment managers control these investments, but you can move your funds to other approved managed investments or reallocate your assets with the same funds managers once a year. Contributions are not tax-deductible, but the earnings are tax-free and qualified withdrawals are exempt from federal income tax.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
If your state or your designated Beneficiary's state offers a 529 plan, you may want to consider what, if any, potential state income tax or other benefits it offers before investing. State tax or other benefits should be one of many factors considered prior to making an investment decision. Please consult with your financial, tax, or other adviser about how these state benefits, if any, may apply to your specific circumstances. You may also contact your state 529 plan or any other 529 college savings plan to learn more about their features. Please contact your financial consultant or call the carrier to obtain a Plan Disclosure Document or prospectus for any of the underlying funds. The Plan Disclosure Document contains complete details on investment objectives, risks, fees, charges, and expenses, as well as more information about municipal fund securities and the underlying investment companies that should be considered before investing. Please read the Plan Disclosure Document carefully prior to investing.