Saving for College? Consider These 3 Unique Savings Vehicles

Every parent dreams of watching their child walk across the stage at their college graduation, receive their hard-earned diploma and enter the real world as a successful, financially independent adult. Unfortunately, the rising cost of college has made that dream more difficult than ever to attain.

The average annual price of a “moderately budgeted” public school in the United States is $24,061. The price for a “moderately budgeted” private school is $47,831. Those prices include tuition, room and board, books, fees and more.1

What’s more, the price of college is expected to rise in the future. College costs are projected to increase 5 percent annually for the foreseeable future. At that inflation rate, the average annual prices for public and private schools in 2030 are expected to be $40,935 and $90,576, respectively.2

If you’re a parent with a young child, those prices may give you sticker shock. The good news is that you have many different resources available to cover the cost of college, including loans, grants, scholarships, work-study programs and more.

However, it’s also likely that you may need to use some of your own savings to pay a portion of the bill. A wide range of savings vehicles are available to help you accumulate money for college. The 529 plan is one of the most popular, but it has a number of limitations, including a possible penalty if the money isn’t used for education.

Before you commit to a certain savings strategy, you may want to explore all your options. Below are three unique tools that may be right for you. Some aren’t traditionally used to fund college, but they can be effective for that purpose if they are used properly.

UTMA/UGMA Custodial Account
A custodial account is a unique tool in which you transfer assets into your child’s name for their benefit, but you still retain control. The UTMA and UGMA acronyms refer to different sets of custodial account rules in the various states. However, both kinds of accounts work in a similar way.

You transfer assets into the custodial account and then manage those assets while your child is a minor. Any earnings in the account may be taxed at your rate or at a reduced children’s rate, or they may go untaxed, depending on the level of earnings.

When your child reaches the age of majority, either 18 or 21 depending on your state, they take over control of the assets. They can use the assets to pay for college or any other goal or expense. Once you transfer assets into the account, you can’t take them out, so be confident in your strategy before you move forward.
Custodial accounts are good options if you want to save money for your child but possibly use the funds for things other than college. For instance, the assets can be used to pay for private secondary school, summer camp, music lessons or virtually any expense for the benefit of the child.

Indexed Universal Life Insurance
You may not think of life insurance as a college savings tool, but it can be effective in the right situation. Life insurance is especially appealing because it does not count as an asset in the financial aid family contribution analysis. The fewer assets you have, the higher your potential aid package is likely to be.

With indexed universal life (IUL), your policy has a cash value account that can earn annual interest based on the performance of an underlying index, like the S&P 500. If the index does well, you earn a higher rate. However, you never lose money because of poor performance.

When you’re ready to pay for college, you can either withdraw your basis in the contract tax-free or take a tax-free loan. However, the loan will need to be paid back. After your child finishes college, you can even keep funding the account to pay for retirement, long-term care or some other future goal.

Roth IRA
Like life insurance, a Roth IRA may not seem like an obvious college funding vehicle. However, it can be used for that purpose, especially if you’re not sure whether the child will go to college and you’d like to use the money for retirement if he or she does not.

In a Roth IRA, you don’t get any tax benefit for your contributions. However, your money grows tax-deferred in the account, and you can take tax-free withdrawals after age 59½. Even if you’re under age 59½, however, you can always withdraw your contributions without facing taxes or penalties.

With the Roth, you have the ability to withdraw money to pay for your child’s college. However, if they choose a different path, you can keep the funds in the Roth and continue saving for retirement.

Not sure which option is right for you? Let’s discuss it. Contact us at Jerry Adams Financial Strategies. We can help you analyze your options and develop a strategy. Let’s connect today.

1http://www.collegedata.com/cs/content/content_payarticle_tmpl.jhtml?articleId=10064
2http://www.businessinsider.com/cost-of-college-in-the-future-is-scary-2014-5
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