Saving for college

As all the kids are heading back to school, you may start thinking about how you are going to pay for college at some point. Financial advisor, Jack Meece with Meece Wealth Management explains three different ways to save for that secondary education.

This is a great time to think about what you are going to do in the future to pay for your children's college expenses. There are many great options out there that are available. They each have their own positives and negatives. A few of these options are savings accounts, custodial accounts, and 529 college plans.

Savings Accounts

We all know about savings accounts. You can open an account that is to save for college be it 5, 10, 15 years down the road. The positives for a savings account is that your principal is very safe and you are not going to see fluctuations. The negatives are that they don't pay very much and you may not be able to reach the goals you need to to pay for school. Also, another negative is you have an expense that pops up at home and you need some money quickly and you don't have adequate personal savings you may unfortunately have to tap in to the college fund because it is very easy to access.

Custodial Accounts

A custodial account is an account that you can set up with your financial adviser or financial firm that is an account that you are in control of that is for the benefit for the child only. You can also invest in anything you want. You can keep it in cash or you can purchase mutual funds or stocks in it. This is one of the positives in that it may grow more and you have many investment options. The negative is that it is taxable and that the principal can fluctuate so you and your adviser will need to monitor it closely especially when you get closer to taking the money for college. Another negative is that if your child doesn't go to school, and depending on the state, but at age 18 or 21 it is essentially their account now and they can take money out for whatever they want. So money you saved for them for college may end up buying a nicer car than mom and dad or a very long vacation.

529 Plans

529 Plans are a college savings plan sponsored by states. In Tennessee, you can choose which plan would most fit your needs. So your financial adviser would help you find the best plan that fits your situation. It essentially is very similar to a Roth IRA. When you open the account, you can contribute to it anytime you want. The main positives about the 529 is that you will always be in control of the account and most importantly it grows tax-deferred and if you use the money to go towards an accredited higher learning institution it comes out tax free. For example, lets say over 18 years, you put in $5000 and it has grown to $10,0000 and you cash it out for your child to pay for college. You don't owe taxes on the $5000 it has grown. The negatives are that you are invested in mutual funds that can fluctuate. Each 529 plan will have aggressive and conservative options that your adviser can help you select.


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