Q: I’ve been starting to look at options to save for my young child’s future education expenses. I know there are a few types of vehicles for this. What are the pros/cons of each option?
A: Since September happens to be National College Savings Month, this is the perfect time for us to explore some tips for saving for college, as well as information about some of the most popular college savings plans.
The leaves are changing, the weather is cooling down, and football is finally back—there’s always a lot happening in fall. But wait, there’s more! September is also National College Savings Month, a time to celebrate the power of investing in education and securing a brighter future for our children and grandchildren.
What is National College Savings Month?
National College Savings Month is an annual observance designed to raise awareness about the importance of saving for higher education. It’s a chance to shine a spotlight on the potential of college savings plans and their impact on shaping students’ lives.
In today’s world, with the growing cost of higher education, saving for college can seem a challenging task. But with a bit of planning and thoughtful decision-making, we can create a brighter future for our children.
Tips for Saving for College
According to the Education Data Initiative, the average cost of attending college (i.e., taking a four-year undergraduate degree program at a postsecondary institution) is $38,270 per student per year.1 With this figure in mind, it’s clear why saving for college is a major financial goal for many parents. Here are some tips to help save for college:
• Start early
Early planning is key to successfully saving for college. By starting to save as soon as possible, you can take advantage of the power of compounding interest, allowing your funds to grow over time. Time is a valuable ally in building a substantial college fund.
• Budget wisely
Creating a carefully planned budget is essential. Knowing your income, expenses, and how much you can allocate to your college fund each month will help you stay on track and meet your goals. Even modest contributions can make a significant difference over time—remember, consistency is key.
• Choose the right investment option
Selecting the appropriate investment option is critical to optimizing your college savings strategy. Options such as a 529 plan, a Coverdell Education Savings Account (ESA), or a custodial account have unique features and benefits. Research and compare these options to find the one that aligns best with your college savings goals.
How to Save for College
There are many different college savings plans and accounts available, and it is important to choose the one that best suits your financial goals and needs. Here are three of the most common college savings vehicles:
• 529 plan
A 529 plan is a tax-advantaged savings plan designed to help families save for future education expenses. Contributions to a 529 plan are made with after-tax dollars, and the earnings grow tax-free.2 When withdrawals are used for qualified education expenses, they are exempt from federal taxes.
Each state typically offers its own 529 plan, and you may have the flexibility to choose any state’s plan that suits your preferences. Some states may also provide additional tax incentives to residents.
• Coverdell Education Savings Account (ESA)
A Coverdell ESA is another tax-advantaged option for college savings. As in a 529 plan, earnings in a Coverdell ESA grow tax-free. Contributions are limited to $2,000 per year per beneficiary, and the funds can be used for qualified elementary, secondary and higher education expenses.3
Eligibility for a Coverdell ESA is subject to an income test, so this type of savings vehicle may not be available to everyone. Nevertheless, it can be a valuable educational savings tool for those who qualify.
• Custodial Account
Opening a custodial account, such as a UTMA or UGMA account, is a straightforward way to save for a child’s education.4 With this type of account, an adult custodian manages the funds on behalf of the child until they reach the age of majority. There are no restrictions on how the funds can be used, which provides considerable flexibility.
It’s important to note that custodial accounts lack the tax advantages of 529 plans and Coverdell ESAs; however, they can still be a viable option for some investors.
National College Savings Month is an excellent opportunity to take proactive steps toward securing a solid educational foundation for your loved ones. While the journey may seem challenging, remember that every contribution counts.
Jeremy R. Gussick is a Certified Financial Planner™ professional at Gussick & Barnett Financial Planning, affiliated with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial planning and retirement income needs of the LGBTQ+ community and was recently named a 2024 FIVE STAR Wealth Manager as mentioned in New Jersey Monthly.** He is active with several LGBTQ+ organizations in the Philadelphia region, including DVLF (Delaware Valley Legacy Fund) and the Independence Business Alliance (IBA), the Philadelphia Region’s LGBT Chamber of Commerce. OutMoney appears monthly. If you have a question for Jeremy, you can contact him via email at [email protected].
This content is developed from sources believed to be providing accurate information and provided with the assistance of Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
Jeremy R. Gussick is a Registered Representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
Gussick & Barnett Financial Planning and LPL Financial are separate entities.
*As reported by Financial Planning magazine, June 1996-2023, based on total revenues.
**Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2023 Five Star Wealth Managers.