Based solely on the calls and emails that come into the show, the number one savings goal people have is saving for their own retirement. Coming in a close second is saving for their children’s college educations. This can be a huge challenge for many parents for several reasons: the unknown cost of tuition 10, 15, or 18 years from now, not knowing whether the children will even choose to go to college, or being unsure of how many years of post-secondary education will be required for the children to reach their academic goals.
Borrowing money to pay for tuition and other expenses can be an option, but beyond that there are a few different ways that someone can put money aside for education.
One of the more popular savings vehicles is a 529 plan. Named after Section 529 of the Internal Revenue Code, a 529 is an education savings plan operated by a state or educational institution in which the contributions grow tax-deferred and distributions to pay for the beneficiary’s college costs come out federally tax free. In most plans, your choice of school is not affected by the state your 529 savings plan is from. A student can be a Florida resident, invest in a California plan, and then attend a college in Texas.
The Coverdell is another college savings vehicle (although the $2,000 annual contribution limit may not allow you to save enough to fully cover education costs). With the Coverdell, you can self-direct your investments, just as you can with your IRA. Furthermore, Coverdells can be withdrawn tax-free for both K-12 and college expenses, while 529 plans are limited to college costs, only.
Which option is right for you depends on many different factors, so it’s best to review each plan with your own financial advisor. A good online resource to review these college savings plans is savingforcollege.com, where you can compare the plans offered by different states to make an informed decision. Keep in mind that if you can only afford to save for either your child’s education or your own retirement, it’s likely a better choice to fund your retirement first.