Question: What’s the best place to save for college…a 529, the bank, an investment?
Answer: It depends, based on your tax situation and whether or not your student will qualify for need-based financial aid.Here are some investments options:
1) Money in the bank
- Not a lot of tax benefits.
- Not currently paying high interest rates.
- Will need to report as an asset for financial aid.
- Be sure to confirm social security numbers/ownership of all bank accounts….parent owned versus student owned accounts.
- Funds may have the opportunity to grow and are accessible to use for college, however, you may have to pay taxes on the distributions.
- Since they are outside of a retirement account, they will count as an asset for financial aid.
- Can make contributions but there are no deduction on taxes.
- Money grows tax deferred.
- Can withdraw contribution amount and if you spend on college, you will not have to pay taxes on the contribution amount.
- May need to pay taxes on the “growth” portion of the contribution. Example: if you contribute $5000 to the ROTH and it grows to $7000, you can withdraw the original $5000 to spend on qualified college expenses and not have to pay taxes.
- Will not count as an asset as it is a retirement account.
- Can make contributions and take advantage of a deduction on taxes.
- Could take IRA funds to use on qualified expenses.
- It will increase your income if you take a withdrawal.
- Contributions can help reduce income
- Advantage: This is a college plan set up by each state for college savings. Grows tax deferred. Can withdraw tax free if spent for qualified education expenses for college.
- Wisconsin offers a state tax deduction for a $3000 contribution.
- Disadvantage: Considered a parent asset for financial aid for all children accounts in the family, not just the college student.
- Current contribution limit $2000.
- Coverdell funds can used for K-12 education expenses.
- These accounts can be invested in stocks, bonds or mutual funds.
- Considered a student asset for financial aid purposes.
- May be beneficial to spend down the assets…must spend on the student.