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College Savings Accounts: Pro’s and Con’s

January 18, 2016
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  1. Non Tax-Qualified Mutual Funds and Stocks
    Pros: Unlimited upside gains, can be sold at any time

    Cons: Not guaranteed. Unlimited downside losses. Any growth is taxed when sold, or each year if there are short term capital gains which the income will be reported on the tax return. Depending on how they are registered, they can count against the student toward financial aid eligibility anywhere from 5.6%-20%

  2. 529 College Savings Plan
    Pros: Tax deferred growth and tax-free withdrawals for qualified expenses. Unlimited upside potential on underlying investments (mutual funds).

    Cons: Unlimited downside potential on underlying investments (mutual funds). Counted as an asset of the owner.

  3. Certificates of Deposit (CD’s)
    Pros: FDIC insured up to $250,000. Guaranteed interest rate.

    Cons: Possible penalties for withdrawing before maturity. Counted in the financial aid formula depending on registration.

  4. Money Market and Bank Savings Accounts (I have lumped these two together since they virtually have all the same features).

    Pros: They are FDIC insured up to $250,000. Typically has a minimum guaranteed interest rate. There are no penalties for withdrawing for college or any other reason.

    Cons: The interest is usually low and probably doesn’t keep pace with inflation. Also, any problems in the banking industry and if banks go out of business, FDIC insurance could be slow to provide any guarantees up to $250,000. It is counted in the financial aid formula.

  5. Non-Tax Qualified Fixed Annuities
    Pros: Principal and interest rate guaranteed. Usually pays a higher interest rate than a bank savings account. Value is not counted in financial aid formulas. Growth is tax-deferred.

    Cons: Possible penalties for pulling out before age 59 ½ and maturity. Taxes owed on any gain distribution.

  6. Tax-Qualified Retirement Accounts
    Pros: Unlimited upside potential. Account value is out of Federal financial aid formula.

    Cons: Unlimited downside potential, penalties and tax consequences with pulling out before 591/2, limited contributions per year. Contributions to such accounts are included back into financial aid formulas.

  7. Treasury Bills
    Pros: Considered by many the safest place to park money. Backed by the U.S. Government.

    Cons: Very low current returns. Penalties for pulling out before maturity. Counted in the financial aid formula. No guarantees on principal if sold before maturity. Possible Treasury Bond Bubble forming that could pop if interest rates rise.

  8. Municipal Bonds including Tax-Free Muni’s and Bond Funds
    Pros: Guaranteed interest rate. Can be tax-free. Relatively safe.

    Cons: No guarantees on the principal. Can be taxed. Included in the financial aid formula. Could be penalties for pulling out before maturity.

  9. Cash Value Life Insurance
    Pros: Guarantees on the principal. Consistent returns. Growth is usually better than any fixed bank savings account. Cash value is not included in the financial aid formulas. Tax deferred growth and potentially tax free withdrawals.

    Cons: Could be some penalties for distributions of gains taken out before 59 ½ years of age.