

Edward Jones column: Study up on college savings vehicles

8:49 PM, May 23, 2013  |  Comments
Glenn Helminiak
Glenn Helminiak
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And both you and your children need to prepare for that day. Your kids can do so by developing good study habits. As for you, it's never too soon to start preparing for the high costs of higher education.


Of course, it's entirely possible that your kids will receive some scholarships or grants, which can significantly lower your out-of-pocket price tag. Nonetheless, it's probably a good idea not to count on your offspring getting a "full ride" to school - which means that you might want to start exploring college-savings vehicles.


When you contribute to a 529 plan, your earnings accumulate tax free, provided they are used for qualified higher education expenses. (Keep in mind, though, that 529 plan distributions not used for qualified expenses might be subject to federal and state income tax and a 10 percent IRS penalty.) Furthermore, your 529 plan contributions might be deductible from your state taxes. However, 529 plans vary, so be sure to check with your tax adviser regarding deductibility.


While a 529 plan might be a good choice for building resources for college, it's certainly not the only choice. For example, a Coverdell Education Savings Account, like a 529 plan, can generate tax-free earnings if the money is used for higher education expenses. However, you can typically only put in a maximum of $2,000 per year to a Coverdell account.

Another college-savings possibility is a custodial account, known as an UGMA or UTMA, which offers some tax benefits, no contribution limits, and might have an impact on financial aid. You also might consider investing in a zero-coupon bond that matures just when your child is ready for college. Unlike other bonds, you won't receive regular interest payments with a zero-coupon bond, but you purchase it at a deep discount, so you might find the affordability factor to be worth considering. (Be aware, though, that even though you don't actually receive the interest payments annually, you'll still be liable for the taxes on them, so before purchasing a zero coupon bond, consult with your tax adviser).

Whichever college-savings vehicles you choose, try to put them to work as early as you can. Before you know it, today's first-graders will be tomorrow's college freshmen.

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