Smart Saving for College—Better Buy Degrees
A number of college savings options offer tax-advantaged ways to save. Taking advantage of these savings options may greatly affect how much you can accumulate for your child’s college education. In addition to the federal tax benefits of many college savings options, there may also be state tax benefits. Savings bonds are usually exempt from state and local taxes. Many states allow you to deduct some or all of your contributions to a 529 plan if you're a resident of the state sponsoring the plan. In addition, states may offer other tax advantages for 529 plans. Because of these state tax benefits, check out your own state’s 529 plan before considering other plans.
Everyone's tax situation is different, and state and federal tax law can be complex. You may want to consult with your tax adviser about which college savings options are best for you.
All of the college savings options discussed above involve various fees and expenses. A college saving option with higher costs must perform better than a low-cost option to generate the same returns for you. Even small differences in fees and expenses can translate into a large difference over time.
While we explain the various expenses involved with many 529 plans, that does not mean that other college savings options don’t have fees and expenses. If you invest in mutual funds through an ESA or custodial account, you should check the fee table in the prospectus to see how the costs of a mutual fund add up over time. If you invest in stock, make sure you understand how much in commissions you must pay and factor this into any gain you may make.
Compared to saving for retirement, your college saving timeline is relatively short. At most, it may be 18 years. And for many people, it’s a lot less. This can impact your ability to weather a market decline and increases your risk.
What happens to your college savings if your child decides not to go to college, you have another child or you lose your job? These events and many others could dramatically impact your college savings strategy. Unfortunately, most college savings options have various restrictions and limitations that may impact your ability to react to a changing situation. Review carefully any college saving options you’re considering to make sure they have the flexibility and control you feel you need.
Our College Savings Plan Comparison Chart will help you understand and compare the various restrictions and limitations of each option.
Before investing in any college saving vehicle, carefully evaluate it and its investment options. Investment options with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your goals. To learn more about the investment strategy of investment options you are considering and their risk, you should read the following materials:
Download the print version:
FINRA Investor Podcast, Smart Saving for College—Part 1: 529 Plans
FINRA Investor Podcast, Smart Saving for College—Part 2: Other Tax-Advantaged Options