By Dan Aguanno, CFP ®

Everyone knows the college monster is waiting after high school. As with all of our long term goals, the sooner you start, the easier it is to slay the tuition dragon. Use a college savings calculator or meet with a CERTIFIED FINANCIAL PLANNER ™ Practitioner (or Professional) to come up with a monthly, annual, or lump contribution schedule to keep you on track with the rising cost of higher education. Once you are committed to your goal, use the following information to choose an appropriate savings vehicle:

529 College Savings Plans – 529 plans are the most popular savings vehicles. Each state offers their own state sponsored plan hosted by different mutual fund companies. They offer tax-deferred growth and tax free withdrawals as long as the funds are being used toward qualified educations expenses such as “…tuition, fees, books, as well as room and board at an eligible education institution and tuition at elementary or secondary schools.” (https://www.irs.gov/newsroom/529-plans-questions-and-answers) Contributions are not deductible on your federal taxes but some states DO allow you to take a deduction assuming you use the state plan in which you pay taxes. This is an incentive to use your state sponsored plan. However if your state does not offer a tax deduction, you can choose any state plan. NY’s Vanguard plan is cost effective and has a competitive platform. Virginia’s 529 plan through American Funds is also quite popular and has simple portfolios to choose from. When comparing 529 plans, you may want to take a closer look at things like: tax advantages, plan performance, and management fees. Any relative or friend can set up a 529 plan for a beneficiary. There can only be 1 owner per account but each beneficiary can have multiple accounts. You can contribute up to $14,000 per year or upfront 5 years’ worth of contributions for a total lump sum of $70,000. If you withdrawal the assets for any use besides qualified education expenses, you must pay ordinary income tax on the earnings plus a 10% tax penalty. You’ve enjoyed the tax benefits along the way so it’s only fair if you don’t use the funds for its intended use. If you anticipate the beneficiary may not go to college, you can transfer the assets to another beneficiary as long as they are a family member with no questions asked. Finally, and most importantly, the owner of the account ALWAYS maintains ownership. The assets never default to the control of the beneficiary. This is extremely important in the event an 18-year-old is not mature enough to handle such a large sum of money.

Coverdell Education Savings Account (ESA) – The limit to contributions into a Coverdell ESA is $2,000 per year. Tax treatment is similar to 529 with tax deferred growth and tax free withdrawals for qualified education expenses. The beneficiary gains control at age of majority (18 or 21 depending on the state). If you earn more than $95,000 as an individual or $190,000 married filing jointly, you begin to phase out your ability to contribute until you are completely phased out at $110,000 of income for individuals and $220,000 for married couples.

Uniform Gift to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA) – UGMA/UTMAs were popular before 529s came into existence in 1996. They are essentially custodian accounts in which the beneficiary can become the owner upon age of majority. No limits on contributions. Tax advantages are far less attractive. Growth and withdrawals are not tax-free like ESAs or 529s. Earnings on the first $1,050 are tax free. From $1,050 to $2,100 earnings are taxed at the child’s tax rate. Above $,2100 earnings are taxed at the parents’ tax rate. This scale prevents rich parents from establishing huge UGMA/UTMAs simply to earn investment income at their child’s tax bracket. The flexibility of the UGMA/UTMAs are the most attractive feature. They can be used for any purpose, not just education.

Juvenile Cash Value Life Insurance Plans – Agreed it’s an eerie thought to place insurance on a child but these whole life policies come with a ton of benefits. These “kiddie” policies are whole life policies which offer a permanent and many times increasing death benefit along with cash value. The cash value is a type of savings account that grows based upon the dividends of the policy. The cash value grows tax deferred and can be accessed via a loan which make the withdrawals tax free. The dividend rate is usually much more stable and conservative than the equities of the above mentioned investment accounts. The child also locks in their insurability for the rest of their life at the best rates they will ever qualify for. The owner has the option to transfer ownership if they so choose after the child becomes 18. Lastly. The cash value does not need to be used for education.

This comparison excludes other common vehicles that most parents use to fund higher education. These include student loans, home equity lines of credit (HELOC), their own investment accounts, and simply cash flow. Consider appropriate planning tools that can help give you flexibility and offer some type of benefit. 529s offer significant tax, ownership, and contribution advantages ASSUMING the child goes to school. Other vehicles offer more flexibility if the child chooses not to go to school. A combination of 529s with an UTMA or juvenile life insurance policy can offer a solid financial foundation for your kids’ future no matter where their life leads them.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Guarantees for life insurance plans are based on the claims paying ability of the issuing company.

The payment of dividends is not guaranteed.

Daniel Aguanno is a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional and holds his series 7, 66 registrations through both LPL Financial and Private Advisor Group along with his life and health insurance licenses. He works at the Bleakley Financial Group and can be reached at 973-575-4180 or daniel.aguanno@bleakley.com.

Securities offered through LPL Financial, Member FINRA/SIPC.  Investment advice offered through Private Advisor Group a registered investment advisor.  Private Advisor Group and Bleakley Financial Group are separate entities from LPL Financial.