Bringing home a new baby is an exciting time in life. Terrifying but exciting, as life gets flipped upside down. Date nights are traded (for a time at least) for precious minutes of sleep. Suddenly the Electronics Store credit card is traded for a Baby Store account and the tech budget-buster is a baby monitor, not a new flat screen. Trying to keep your head for the next 24 hours is hard enough, let alone think ahead to the college years to come. But think ahead you must.

Save Early

Consider that, according to Schwab MoneyWise, “a family who begins to save just $100 a month at a child’s birth can accumulate almost $35,000 by the time the child is 18, earning 5 percent interest per year. Wait until the child is 10 years old to start saving, and that’s reduced to less than $12,000.”

There are two important questions to think through:

  1. How much do you want to try to contribute to your child’s education expenses?
  2. How will you save most effectively?

To help you answer the first question, consider that the College Boards Annual Survey of Colleges says that the average annual Tuition and Fees with Room and Board for a Four-Year In-State public school is $20,090 for 2016-17. If you are considering a Private Nonprofit Four-Year, that jumps to $45,370. That number will likely only continue to increase. While hopefully scholarship and grants help, if you plan on helping with costs, you should start saving now.

To answer the second question, here is a primer on your college savings options.

529 Plans vs. Education Savings Accounts (ESAs/Coverdell)

Both a types of college savings plans offer tax-deferred growth. If the proceeds from the accounts are used to pay for qualified education expenses (tuition, books, supplies, room and board), the money including gains and investment income, can be withdrawn tax-free. And both plans are considered to be your assets, not your child’s, which limits the impact when filing a Free Application for Federal Student Aid (FAFSA).

There are some differences between 529 Plans and ESAs:

529 Plans ESAs/Coverdell
Anyone can open a 529 plan. There are no income limits for opening and funding a 529 account; friend and can contribute regardless of who opened it. Only couples with adjusted gross income of less than $220,000 can open an ESA
You can deposit up to $65,000 per year without incurring a gift tax, as long as you make a special election and the contribution is your only gift to that beneficiary for five year. Otherwise, the max is $14,000 per year. Contributions are limited to a maximum of $2,000 per year until the beneficiary’s 18th birthday
Plans vary by state and differ on costs, program features and investment selection. The account must be liquidated at age 30; however, the designated beneficiary may roll over the full balance to a different Coverdell ESA for another family member, thus avoiding the taxes and penalty.
Withdrawals from a 529 account can be used to pay for qualified educational expenses at any eligible U.S. postsecondary institution. Can be used for qualified elementary and secondary education, as well as for postsecondary school.


Need help navigating the complexity and deciding which is right for you and your family? Talk to an advisor today.