What To Look For In a College Savings Account

There are so many ways to save for college, it can be easy to get overwhelmed. Luckily, we cover the best modern college savings options to make your life easier.

October 22, 2020
Sootchy Team
What To Look For In a College Savings Account

Anyone who’s seen the exorbitant price tag on a college degree knows that paying for higher education is no easy task, even with years or decades in which to save up. Students can easily require more than a hundred thousand dollars to cover their college education, and the cost has been steadily increasing year after year, so there’s no telling how much parents of young children might need to shell out in 17 or 18 years. To help prepare for these costs, many parents look at different options to save, some of which can provide substantial returns on investments (tax-free, in a few cases). If you want to start setting aside resources to pay for your child’s education, you’re probably wondering, “What is the best type of account to save for college?” To find out, keep reading as the experts on college savings plans over at Sootchy provide answers to this important question.

Types of Accounts That Can Help You Save for College

To help you narrow down your options when choosing a college savings plan for your child or family member, we’ll look at the most popular account types and examine their effectiveness as financial tools for this particular goal. The following are some of the top accounts used to save for college:

Standard Savings Accounts

The most familiar type of account for parents of all stripes is the standard savings account available at almost every bank or credit union. Because of its ease of use, a savings account can be a handy way to set aside funds for any purpose, including college tuition, but these accounts suffer where returns are concerned. Most of these accounts earn interest at a rate well below 1%, with many offering as little as 0.05% APY on balances.

This can limit the usefulness of savings accounts for those looking to cover a significant cost as, even with the benefit of time, a traditional savings account won’t make you much money. However, it’s worth noting that these accounts can be used to cover expenses other education savings plans cannot, so they may be a useful supplement to your overall strategy.

529 Plans

Though they’re often treated like one tool, three savings options fall under the term “529 plan,” as all three were created through Section 529 of the Internal Revenue Code. Whichever kind you choose – the education savings plan, prepaid tuition plan, or ABLE account – you can use your plan to invest contributions and generate potentially significant returns, and best of all, your earnings can be put toward qualifying education expenses tax-free.

Each state offers one or more plans, so residents of any locale can shop around and browse a variety of options before settling on a plan that works for them. This flexibility – along with the accounts’ tax-advantaged status – makes 529 plans one of the most commonly used ways to save for college these days.

Coverdell Education Savings Account

In a lot of ways, a Coverdell Education Savings account functions as a lighter, more flexible version of the 529 plan. Like 529 accounts, Coverdell accounts grow tax-free, and their use won’t be taxed either, as long as they go toward the cost of education. Both plans can be used to help fund elementary or secondary education as well as college, but 529 plans can only go toward tuition at K-12 schools, while Coverdell accounts can be used for a variety of expenses.

However, there are some strict limitations on how much can be contributed to a Coverdell Education Savings account – up to $2,000 per year. By comparison, a parent or relative can add tens of thousands of dollars a year to a 529 plan, and the first $15,000 is free of any gift taxes. Also, the owner of a 529 account – whether a parent, guardian, or relative – retains control of those funds at all times, whereas the ownership of a Coverdell account transfers to the child once they reach age 18.

How to Choose the Right Account to Save for a College Education

In addition to the aforementioned account types, parents have a ton of options to help them save for their child’s college education, from UGMA custodial accounts to Roth IRAs and beyond. So how do you pick the right one, when so many tools are available? Ultimately, the best account to save for college is the one that delivers on three points:

• It lets you contribute whatever amount you want at whatever pace you want.

• It provides a solid rate of return on your investment.

• It can be used for the purposes you have in mind.

As you can see, the standards outlined above largely depend on your unique financial goals. If you only plan to add $1,500 a year to the account and want to put it toward a private high school, a Coverdell account could be a good choice, but if you want to save for college, contribute more than $2,000 a year, maximize your investment, and keep your child’s options open, a 529 education savings plan may be more appropriate. It all depends on what you’re looking for.

Download the Sootchy App to Open or Contribute to a 529 Plan Quickly and Easily

Although saving for college can be a dizzying endeavor, starting a 529 plan for your child doesn’t have to be. By working with the team at Sootchy, you can pick an account, add funds, manage your investment, and even allow relatives to donate, all through an easy-to-use smartphone app. Learn more by visiting Sootchy online or downloading our app today.



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