This blog is a way for me to share hard learned lessons about money with those who are just starting out on their own. I hope it's a way for you to avoid making the mistakes I made, and to benefit from my experiences

Tuesday, August 01, 2006

Saving for College

I've been looking into saving for my son's college education. So far, every educational plan leaves a bad taste in my mouth. Of the educational plans, the 529 seems the best so far.

Each state has it's own plan, but the California plan is a good one. It's a low fee plan and the earnings avoid federal and California state tax, when used on qualifying education expenses. Sounds great, right?

Here's the part that leave a bad taste in my mouth. If my son chooses not to go to college or any higher education, and I wish to take that money and use it for my own purposes, I have to pay income taxes on the earnings, because they grew tax free, plus I have to pay a 10% Federal Additional Tax and 2.5% State Additional Tax in penalties. In other words, if my son chooses not to go to college, then 1/8th of my earnings are vaporized in penalties, in addition to the income taxes I'll pay. Ouch!

Another suggestion given to me was to save that money via a Roth IRA. Even though a Roth IRA is for retirement, you can later pull out the contributions you made (not the earnings) and not pay any taxes or penalties, because the money has already been taxed. The earnings can be taken out later after age 59 tax free. The downside is that I can only contribute $8K a year for my wife and myself, and we may want to use that for our retirement first.

Lastly, someone else suggested I-Bonds, where the earnings are not taxed by the state, and are exempt from federal taxes if used for educational expenses. The downside is that the I-Bonds are earning very little right now.

So for right now, my son's college savings is on hold, until I exhaust my search for a better plan that doesn't penalize me if he doesn't go to college.

If anyone has a better idea, please leave me a comment. Remember, a big factor is avoiding penalties if he doesn't go to college.


Blogger Jannette said...

Hi Kevin,

I'm investigating 529s too (they have great growth records... maybe enought to offset penalty?...)

I also joined a free saving service and have put away a few hundred just from my online shopping. (much better than upromise, imho.)

-- Jannette G.

8/02/2006 3:59 PM

Blogger WorriedAboutCollegeDad said...

I've already opened up a 529 plan for my 2 and 4 year old. I hope to have enough to be able to pay for at least 1 of their college educations by the time they reach 18. But I strongly believe in a higher education so my kids will(hopefully) choose to go to ANY college. I've tried Little Grad and am quite happy as well. You should just google college savings and see what pop ups.

8/14/2006 10:08 AM


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