Have you ever wondered how you’re going to pay for your children to go to college? Or do you want to create a legacy of education for your grandchildren? September is college savings month so we wanted to devote some time on the blog to this topic. I’m going to focus on the different options you can use rather than discussing whether you should.

With that in mind, the most common way people are saving for college today is the 529 education savings account. Let’s dig into some of the key benefits of this account:

  • This is an account where you can invest the funds to grow to pay for college costs in the future. Depending on which 529 account you use, the investment options will vary but they are typically mutual funds.
  • The funds grow tax-free and are withdrawn tax free as long as they’re used to pay for qualified education expenses. This is a huge benefit and you can’t get this in any other account.
  • You name your child, grandchild, or loved one as the beneficiary which means the funds are to be used for their educational benefit. There is some flexibility where if a child decided not to go to college or gets a scholarship, you can change the beneficiary to another direct family member.
  • The 529 account can now be used to pay for K-12 private school in addition to college.
  • The 529 account can now be used to pay for K-12 private school in addition to college.
  • 529s receive favorable treatment when you’re applying for financial aid through the FAFSA.

1.College Foundation of North Carolina

a. This is the 529 account adopted by the state of NC.

b. It is a direct plan which means advisors cannot be involved or linked to your account. This keeps the costs low.

c. This plan is best for those who are comfortable managing the account themselves and picking investments.

2. College America

a. The College America 529 plan is the state plan for Virginia. It doesn’t matter what state you live in or whether you choose your state’s plan as you can use funds in the VA plan to pay for college in NC, Florida, or Wyoming.

b. This plan does allow advisors to be involved so for those clients who want help setting up, choosing investments, and maintaining their account, this is an option we often use.

c. The costs are higher compared to the NC plan because an advisor is involved.

There are several other options for college savings that might be appropriate based on your situation. I’ll briefly mention each:

  1. Prepaid savings plan – with this option, you go ahead and prepay college today to lock in current prices. The beauty of this option is it’s already paid for and you don’t have to worry about how much costs increase between now and when your child goes to school. The main reason people don’t use it is because it does limit your child’s choices of where they can go to school.
  2. Investment Account – this is a great option for those who want ultimate flexibility. Inside this type of account, you can invest the money in just about any way you want and the money can be used for any purpose, not just limited to college. The downside compared to the 529 is there are no tax benefits. As you have dividends, income, or capital gains, you’d pay taxes on them annually.
  3. Roth IRAs – this option is a bit more nuanced because you’re using a retirement account. This option is frequently used by those who are trying to save for retirement but want to give them an option to use some of the funds for education if needed in the future. There are some very specific tax rules here so please talk to your CPA or other professional to learn more before choosing this option.

Let us know what questions you have or if you’d like to schedule a short call to learn more!