Dear Orion,
I have three young kids (5, 3, and 7 months) and would like to save for college for them. What is the best way to do so to maximize returns and plan for contingencies such as scholarship money or the chance that one of our children decides not to attend college?
Chris
Dear Chris,
Thanks very much for your question.
Our best advice is: Start early! There are many options for those saving for your kids’
college education, but perhaps the single best tool is the 529 plan. With 529s,
contributions are made after tax, but the plan assets grow tax deferred. Then, if the
funds are ultimately used for qualified education expenses (which, of course, is the
object), there is no tax due on the gains made in the plan. The plan is held in the name
of the parent, with the child named as the beneficiary.
To complicate matters, there is a 529 plan for every state, each with different investment
options and fee schedules. One good place to compare 529 plans online is
here. You are not limited to using the plan from the state where
you reside. In general, we recommend an aggressive growth allocation when beginning
to save for young kids.
There is no single method that works for everyone when it comes to saving for college,
and most parents will find it useful to employ other strategies as well, including, but not
limited to, Coverdell Education Savings Accounts, custodial accounts (UTMA/UGMA)
and normal savings accounts. Each of these types of accounts has its own specific
advantages and limitations. But our primary recommendation is to open 529 accounts
as early as possible for each of your kids and begin funding them regularly. This gives
your kids the most time possible to take advantage of the tax benefits that 529 plans
offer.
If one or more of your kids do not go to college or gets a big scholarship, you can
simply change the beneficiary of the child’s 529 plan to one of his or her siblings. If you still end up with unused funds in a 529, recent law changes have
made it possible to roll excess 529 plan funds into a Roth IRA for the beneficiary, with
some restrictions.
Saving for college, like any long-term financial goal, requires planning and commitment.
As with pursuing any goal, the single most important thing is to get started and to get
those accounts open for your kids.
If you have any questions or need any guidance, please feel free to contact us directly
at: [email protected]
Have a question for Orion Capital Management? Email [email protected] with your financial questions.
