Saving for College

It's never too early to start saving for college and below are some examples. Also, saving reduces your reliance on an uncertain financial aid system and planning for college costs helps control your educational destiny.

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  • 529 College Savings Plans are educational savings plans operated by a state or educational institution designed to help families set aside funds for future college costs.  Earnings grow tax-deferred and distributions are tax-free when used for qualified post-secondary education costs.  They are named after the Section 529 of the Internal Revenue Code which created these plans in 1996.  529 plans can be used to meet costs of qualified colleges nationwide.  For an example of Connecticut's plan visit CT Higher Education Trust.  
  • Corporate 529 Plans are company 529 employee benefit plans tied to payroll deductions. 
  • Coverdell Education Savings Accounts (ESA) are tax-advantaged investment accounts designed to encourage savings to cover future educational expenses found in Section 530 of the Internal Revenue Code. Earnings grow tax-deferred and distributions are tax-free when used for qualified post-secondary education costs. ESAs can also be withdrawn tax-free for primary and secondary education costs.
  • Custodial Accounts are accounts created by a bank, brokerage firm or mutual fund company that is managed by an adult for a minor that is under the age of 18 to 21 (depending on state legislation).
  • Prepaid tuition plans allow prepay tuition and fees at a state college or university at current plan prices. Payments are made now or a series of payments over time and the program promises to pay future tuition and fees for a certain number of credit hours or semesters at specified colleges or universities.  State-run programs are geared to families intending to send their children to public in-state institutions. 
  • Traditional & Roth IRAs (individual retirement accounts) are savings plan for retirement. Roth IRAs involve making after-tax contributions so that withdrawals are tax-free in retirement whereas Traditional IRAs contributions may be tax-deductible and withdrawals are taxed in retirement.  Early withdrawal penalties are waived when Roth and traditional IRAs are used to pay the qualified post-secondary education costs of the owner, spouse, children or grandchildren.  However, taxes may be due on the withdrawals.  
  • Tuition reimbursement by companies allow employees to be reimbursed for college coursework usually after the employee shows proof with a transcript of successful passing of the course(s).  Check with your employer to see if they offer such a benefit.
  • U.S. Savings Bonds are registered, non-callable, non-transferable bonds issued by the U.S Government that are exempt from state and locals taxes and federal taxes are deferred until the bond is redeemed. Additionally, if the money received at redemption is used to pay tuition expenses for the holder, a spouse or a dependent in the same year, the interest earned may be exempt from federal taxes as well.  Face values range from $50 to $10,000.
  • Annuities are retirement products that may be used to help one increase savings, protect savings, or generate a stream of income.  
  • Variable Life Insurance Policies mix life insurance with investment accounts that offer tax-deferred advantages and are not considered assets on the FAFSA.  Generally there are no limits to the amount invested and parents control the money at all times.  The owner can borrow or withdraw contributions without tax or a penalty.

Disclaimer:  The above are options for college savings, not financial investment advice.