Other Savings Options

While 529 plans may be the hottest and most flexible way to save for college, there are other, non-traditional methods which make sense in certain cases. Recent laws make saving for college via Roth IRAs a lot more favorable than in the past. All three major retirement vehicles listed below have advantages over 529 plans and Coverdells in that none of them count as assets for financial aid purposes, which generally increases grants and overall aid. See the list below for a quick overview:

Roth IRA – flexible saving for retirement or education

If a family qualifies for a Roth IRA (income phase outs apply, if adjusted gross income is between $95,000 – $110,000 for singles, $150,000 – $160,000 for couples), it would be a wise investment for the reason that it is extremely flexible. With a $3,000 annual contribution limit, slated to increase to $4,000 in 2005 and $5,000 in 2008, Roth IRA funds may be withdrawn free of federal income tax (and in some cases, state tax-free) to pay qualified educational expenses. Otherwise, for retirement purposes, there are a ton of intricate laws which make the comparison of Roth IRA to other forms of retirement savings an ongoing debate.

Traditional IRA

Like Roth IRAs, Traditional or Classic IRAs have a $3,000 annual contribution limit and are able to be withdrawn early for educational expenses. While withdrawals are not tax-free, contributions into Traditional IRAs are tax deductible on both federal and state levels. The only other downside is a low income phase out range for those who have a 401(k) account at work ($32,000 – $42,000 for singles, $52,000 – $62,000 for joint filers).

Borrowing from 401(k)

This is not a very favorable strategy, since educational loans have more promising features, such as low interest rates and tax-deductibility. However, for those who have saved religiously in their 401(k)s and have children in or near college age, it is a viable last resort. But watch out – if you leave your current employment, the entire loan must be repaid immediately.

Mutual Funds

The main purpose in utilizing mutual funds for eduction savings is the investment flexibility and lack of restrictions on contributions. This is an option for the savvy investor or for families with fluctuating and uncertain financial circumstances. The opportunity cost of using a heavy mutual fund strategy is giving up large tax breaks, which could amount to thousands of extra dollars. Think twice and consider a 529.