Saving for College


college_fbIt’s no secret: the cost of a higher education is continually rising. Yet students continue to attend and graduate from college every year. Are you wondering how they – and their parents – managed to make it happen?


How can you ever save enough?
The good news, of course, is that you don’t have to save enough money to cover all of your students’ costs. Most students have access to grants, loans, work-study options, and more to help them pay for their education.


1) 529 plan
What it is: an investment account that you can use for college savings, or prepaid tuition. (Prepaid tuition allows you to purchase tuition credits at today’s prices, to be used at a specific college in the future.)

Why people use it:
-Contributions grow tax-deferred.
-Withdrawals are tax-free at the federal level, assuming they’re used for qualified educational expenses – and some states offer additional tax advantages. (Penalties apply if the money is used for another purpose.)
-Savings funds are directed to the investment portfolios of your choosing.
-There is no income level restriction in order to make contributions.


2) Coverdell ESA
What it is: a tax-advantaged education savings vehicle that lets you contribute up to $2,000 per year for a beneficiary's K-12 or college expenses.

Why people use it:
-Your contributions grow tax deferred.
-Earnings are tax-free at the federal level if the money is used for qualified education expenses.
-You have complete control over the investments you hold in the account.

Note: There are income restrictions on who can participate, and the $2,000 annual contribution limit isn't likely to put much of a dent in college expense

3) U.S. savings bond
What it is: an investment backed by the federal government with a guaranteed, modest rate of return.

Why people use it:
-The interest earned on Series EE and Series I saving bonds is exempt from federal income tax if the bond proceeds are used for qualified college expenses.

Note: To qualify for tax-free interest, you must meet income limits.

4) Custodial Account (UTMA/UGMA)
What it is: an account that allows a minor child to hold investment assets in his or her own name, with an adult as custodian.

Why people use it:
-All contributions to the account are irrevocable gifts to the child, and assets in the account can be used to pay for college. When the child turns 18 or 21 (depending on state law), he or she will gain control of the account.

Note: Earnings and capital gains generated by the account are taxed to your child each year. Certain tax laws help minimize their taxes, though. See a financial advisor at Horizon Bank for details.

5) Roth IRA
What it is: an investment option that is not technically an education fund, but is often used that way.

Why people use it:
-Contributions can be withdrawn at any time and are always tax-free.
-For parents age 59½ and older, a withdrawal of earnings is also tax-free if the account has been open for at least five years.
-For parents younger than 59½, a withdrawal of earnings — typically subject to income tax and a 10% premature distribution penalty — is spared the 10% penalty if the withdrawal is used to pay for a child's college expenses.


Remember: The more you save now, the less you and your child will need to fund later! Talk to Horizon Bank for Sensible Advice on the best options for you, and your child’s future.