Compare College Plans
You didn't think we would leave you hanging out in the college savings abyss all alone did you? This oh-so-useful chart will help you sort through the features of each college savings vehicle we profiled.
| What Can Funds Be Used For? | Risk | Tax Benefits | Financial Aid Impact | Return Rate |
|---|
| Checking and Savings Accounts | Anything! | None! | None :( | High. You'll lose 20 cents for every dollar in an account in the student's name. 6 cents for every dollar in an account in your parent's name. | Almost nothing :( |
| 529 Prepaid Plans | Tuition and fees only. Expect to pay back taxes and a 10 percent penalty on earnings if you use your funds for other purposes. | None! | High! These plans offer federal tax benefits and sometimes state ones too. | Moderate. You'll lose 6 cents in federal financial aid for every dollar in a 529 account. | High! College costs are climbing about 8 percent each year. |
| 529 College Savings Plans | Any qualified college expense. Expect to pay back taxes and a 10 percent penalty on earnings if you use your funds for other purposes. | Low to high depending on where you invest funds. To keep risk low, shift from aggressive to conservative funds as the child ages. | High! These plans offer federal tax benefits and sometimes state ones too. | Moderate. You'll lose 6 cents in federal financial aid for every dollar in a 529 account. | Low to high depending on where you invest funds. |
| Stocks, Bonds, CDs, and Mutual Funds | Anything! | Low to high depending on where you invest funds. | None :( | High. You'll lose 20 cents for every dollar in an account in the student's name. 6 cents for every dollar in an account in your parent's name. | Low to high depending on where you invest funds. |
| UGMA/UTMA Accounts | Anything! | Low to high depending on where you invest funds. | Moderate. Limited federal tax incentives are available. No state tax incentives. | High. You'll lose 20 cents for every dollar in the account unless you roll funds over to a 529 plan. | Low to high depending on where you invest funds. |
| Roth IRAs | Moderate. You can use Roth funds tax-free to pay for college, a first-time home purchase, retirement, or permanent disability. Otherwise you'll pony up back taxes and a penalty. | Low to high depending on where you invest funds. | Moderate. Federal income tax advantages abound, but none are available for state tax. | None to awful. Parents who use Roth funds to pay for the student's senior year in college won't have any financial aid implications. Otherwise, Roth distributions can subtract up to 47 cents from the aid package for every dollar withdrawn. | Low to high depending on where you invest funds. |
By this point, you probably feel exhausted. If all of this college savings jargon seems overwhelming, that is ok. A tax advisor can help you sort through which savings products will suit your family best. Also if you decide that your family's needs have changed—if, for example, tax benefits become a bigger priority or your child decides not to go to college—you can always change your college savings plan to fit your family. Having a plan and saving as early as possible are the most important pieces.
