Ask an Advisor: About Saving for College

We just had a baby, how soon should I start savings for my child’s college?

The best answer I can give to that question is, start now.  As a new parent you are likely overwhelmed by all the increased responsibilities and it is easy to put off the future, but don’t. The sooner you begin saving for college, the more time your savings will have to grow.

How do I figure out how much I need to save?

There are some very good college savings calculators online that will help you estimate the future cost of college based on your child’s age, rising education costs, and the current annual average college costs.

Once you identify the estimated cost, figure out how much annually you need to be saving in order to meet that goal. If you cannot cover the entire cost, don’t worry, there are plenty of scholarships and work study programs your child may be eligible for in the future.

It is important that you do not forgo saving for your own retirement in order to increase savings for your child’s college.  Keep in mind the fact that your child can get a loan for college but you cannot get a loan for retirement.

What types of accounts can be used for college saving?

Technically any savings or investment account (outside of a retirement account) can be used, but there are state sponsored accounts that allow some tax benefits. 529 College Savings Plans are a popular option because they allow you to receive a state tax deduction for contributions. You may also want to consider Pre-paid Tuition or opening an UGMA account.

There are pro’s and con’s to each of these accounts and you need to determine which type of account best fits your needs. It is important to understand and compare the yearly contribution maximums, tax benefits and the withdrawal restrictions.    

What happens if my child does not use the money I’ve saved in a 529 Account?

Most people don’t realize that 529 assets can be used at any eligible institution of higher education. That includes not only four-year colleges and universities, but also qualifying two-year associate degree programs, trade schools and vocational schools—both at home and abroad.

You also have the right to change the beneficiary on your 529 account.  As long as the new beneficiary is a family member (sibling, first cousin, aunt, uncle, grandparent, or even you) the money can be used for qualified education expenses without being charged income taxes or penalties

Taking the cash is always a possibility, but if assets in a 529 are used for something other than qualified education expenses (tuition, required fees, books, supplies, computer-related expenses, room and board etc.) you will have to pay both income tax and a 10% penalty on the earnings. Since one of the main benefits of a 529 account is the tax-free earnings, I’d think carefully before cashing it out.

*An interesting side note is that if the beneficiary gets a full scholarship to college, the penalty for taking the cash is waived


Belle Schneider is a Portfolio Manager at VLP Financial Advisors, she believes that strategic planning is the key to creating, protecting, and growing wealth. 

Want to learn more?

Visit: www.vlpfa.com or submit your question for an Advisor to info@vlpfa.com.

VLP Financial Advisors

8391 Old Courthouse Rd., Suite 203
Vienna, VA 22182

Belle Schneider is a Registered Representative of and offers securities and Advisory Services through Cetera Advisor Networks LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity.

*All situations are different, please consult your financial professional for information regarding your needs and suitability issues. An investor should consider the investment objectives, risks and charges and expenses associated with municipal fund securities (529 Plans) before investing. More information about municipal securities is available in the issuer’s official statement. The official statement should be read carefully before investing. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

Share this Post!

Related post