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Which College Savings Plan Is the Best for Your Family?

529s, Roth IRAs, and Coverdell ESAs are all popular, but their benefits aren’t identical.

By Brian Stoffel

It’s no secret that the cost of attending college has gone through the roof over the past few decades. A degree that could be earned for just a couple thousand dollars four decades ago can now require parents to take out a second mortgage on their house. Given this new reality, saving for your children’s college education has never been more important.

But what vehicles should parents use when preparing for the day their kids leave home? There are lots of options out there, but the three most popular are 529 Plans, Roth IRAs, and Coverdell Education Savings Accounts (ESAs).

When it comes to the differences between these accounts, here’s a view from 30,000 feet:

529 Plans

The most important thing for parents to know about 529 Plans is that every state has its own set of options for parents. However, you do not need to use the 529 Plan offered in your state, or the state where your child’s future college is located. A California resident can invest in California’s 529 plan … or Oklahoma’s … or Ohio’s. The options are almost limitless.

The key advantage to this is that this allows parents to shop around for the best plans with the lowest expense ratios. Last year, I dug through all of the plans offered in the U.S. The states whose funds had the highest returns with the lowest expenses were: Illinois, Kansas, New Mexico, West Virginia, Massachusetts, New Hampshire, Delaware, California, Rhode Island, Iowa, Maine, Missouri, and Alabama.

The drawback with investing in another state’s plan is that you usually forfeit any state tax-related advantages. That being said, there’s no federal break for 529 contributions, and state income taxes are usually far lower than federal ones — so the benefits of such deductions can be limited.

Roth IRAs

In terms of investing for higher education, there are two main differences between setting up a Roth IRA for your child, and just investing the money in your own name in a non-tax-advantaged account.

The first is that the money is in your child’s name, and such funds are not taken into consideration on FASFA forms — though individual colleges may consider them when determining potential aid.

The second is that if there is any money left after your child has graduated, he/she can keep that as a nice start on their retirement savings.

Otherwise, this isn’t any different than a non-tax-advantaged account.

Coverdell ESAs

If you are an experienced investor, I consider this the crown jewel of education savings. You get to choose how your money is invested, and all growth and withdrawals can be made tax-free — assuming that the funds are used for qualified education expenses. Note that these can also include expenses for elementary, middle, or high school tuition and/or fees.

How my family uses these three

Because I spend my time writing for the Fool, I feel comfortable investing what money we can for our 3-year-old daughter’s educational expenses. Every year, we max out her Coverdell account, and invest it in the most promising opportunities we can find.

After that, our dollars will go toward a 529 plan; though we haven’t opened up an account yet, we will likely use an Illinois state plan — as I have found them to be the lowest-cost plans around.

Every family’s situation, however, is different. This should help give you a broad view of your options, but there is no replacement for reviewing them with your own financial advisor.

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Drew Limsky

Drew Limsky

Editor-in-Chief

BIOGRAPHY

Drew Limsky joined Lifestyle Media Group in August 2020 as Editor-in-Chief of South Florida Business & Wealth. His first issue of SFBW, October 2020, heralded a reimagined structure, with new content categories and a slew of fresh visual themes. “As sort of a cross between Forbes and Robb Report, with a dash of GQ and Vogue,” Limsky says, “SFBW reflects South Florida’s increasingly sophisticated and dynamic business and cultural landscape.”

Limsky, an avid traveler, swimmer and film buff who holds a law degree and Ph.D. from New York University, likes to say, “I’m a doctor, but I can’t operate—except on your brand.” He wrote his dissertation on the nonfiction work of Joan Didion. Prior to that, Limsky received his B.A. in English, summa cum laude, from Emory University and earned his M.A. in literature at American University in connection with a Masters Scholar Award fellowship.

Limsky came to SFBW at the apex of a storied career in journalism and publishing that includes six previous lead editorial roles, including for some of the world’s best-known brands. He served as global editor-in-chief of Lexus magazine, founding editor-in-chief of custom lifestyle magazines for Cadillac and Holland America Line, and was the founding editor-in-chief of Modern Luxury Interiors South Florida. He also was the executive editor for B2B magazines for Acura and Honda Financial Services, and he served as travel editor for Conde Nast. Magazines under Limsky’s editorship have garnered more than 75 industry awards.

He has also written for many of the country’s top newspapers and magazines, including The New York Times, Washington Post, Los Angeles Times, Miami Herald, Boston Globe, USA Today, Worth, Robb Report, Afar, Time Out New York, National Geographic Traveler, Men’s Journal, Ritz-Carlton, Elite Traveler, Florida Design, Metropolis and Architectural Digest Mexico. His other clients have included Four Seasons, Acqualina Resort & Residences, Yahoo!, American Airlines, Wynn, Douglas Elliman and Corcoran. As an adjunct assistant professor, Limsky has taught journalism, film and creative writing at the City University of New York, Pace University, American University and other colleges.