If you are a parent.. August has you planning and shopping for back to school. The grade school through high school years have you shopping for things like shoes, clothes, back packs, notebooks and other school supplies. These are the years though that planning for college or education after high school needs some thought. There are tools available to help with these years so let’s explore a couple of those.
- Custodial Accounts – These have been around for a long time. They are set up by parents or grandparents for the benefit of the minor. The custodian makes the investment decisions. The account however is the property of the child. It is managed by the custodian until the child reaches the age of 18 or 21. It is then, at that time, transitioned to them. These accounts can sometimes limit the financial aid they can be eligible for, as the account is considered an asset of the minor.
- 529 Plan – It is a tax-advantaged savings account designed to be used for the beneficiary’s education expenses. The funds can be used at any eligible educational institutions offering higher education beyond high school. A disadvantage is, if you use the funds for anything other than education costs you face a penalty. You can withdraw the money but will be responsible for income tax on the earnings. Federal, state and county if applicable as well as a 10% penalty.
- Roth IRA – Because of it’s flexibility and investment choices, it has become a good savings tool for education. The parent can open an account, fund it over the years, and then use it to pay for education expenses for their children. Withdrawals are exempt from penalties when used for education, however not exempt from income tax on earnings unless the account owner is 59 1/2 or older. Another important advantage is if the funds are not all used for a children’s education, they can be used as a retirement account for the owner.
As with any investment account, there are rules and guidelines. It is always good to do some homework and speak to a financial advisor to help you set up a plan that is right for you.