Financial Planning

Ins and Outs of Saving for College

Whether you just had your first child (or grandchild), or your “little” bundle of joy is about to start their new 4-year journey at Harvard, saving and paying for college can be a daunting task. I have seen some estimates as high as $300,000 – $400,000 for a 4-year degree for a current newborn, especially from some of the more expensive private schools. So, it is time to start saving in your 529 Plan, right? Not so fast – at least not for everyone!

Although 529 plans have their upsides, there are some downsides as well. I look forward to discussing various methods of saving for college; one of the largest expenses a family will incur. Keep in mind that you should consider keeping any assets out of the potential college student’s name. The more assets they have, the less likely they will qualify for financial aid.

529 Plans

529 Plans (and other education based savings accounts) are very popular due to their potential tax-free growth and flexibility when it comes to financing a student’s education expenses. Anyone can contribute up to 5 times the current gift tax exclusion (for a total of $70,000) if they then do not provide any gifts for the following 5 years. Most states have their own administration for these plans, but few give any tax deduction in the year of the contribution. The contents of the plan will grow tax-free if used for secondary education, and can be rolled over to another potential student (of any age) if the full balance is not used. That being said, if the balance is not used for college, the withdrawals will be subject to tax and a possible 10% penalty. There is also a cap on how large the account can grow before contributions can no longer be made.

Traditional Brokerage Accounts

Instead of opening a 529 account, a traditional brokerage account (from Fidelity or Schwab, for example) could be more beneficial. On the upside, the assets in the account can be used for any purpose without penalty, and there is no cap on the plan value. Within this account you can hold stocks, bonds, and mutual funds. On the downside, any activity in the account will be taxed in the current year. For example, all interest, dividends, and capital gains are currently taxable. Although there are no penalties for withdrawal for any use, tax is generally due in the year of the activity.

Whole Life Insurance

Although this may come as a surprise to many, whole life insurance often provides a tax deferred or tax-free method of saving for the future. Although the rates of return might not be as high as some traditional stock accounts and the premiums can be high, there are certainly upsides to purchasing the right policy. Along with the tax deferred or tax-free growth on the cash value that I mentioned before, if the owner of the policy happens to pass away, the beneficiaries will receive a lump sum (most likely tax-free) cash payment that can be used for anything, including housing, college, and other bills. So, there is a lot more flexibility here.


As you can see, there are several ways to help save for your current or future student’s secondary education expenses. There are ups and downs to each strategy, and they should be carefully discussed with your CPA or financial adviser to come up with the best plan for you. I look forward to discussing which strategy will work best for you.

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