If you believe your child will attend college, it is a good idea to start saving now to help pay for skyrocketing tuition costs. Although opening a savings account in your child’s name is probably the least complicated way to start saving, it can have some drawbacks. A student with a large savings account in his/her name can miss out on financial aid and grants since financial aid is based on income and assets. Additionally, a savings account does not have any tax benefits.
There are, however, a variety of options that have tax benefits and do not greatly impact a child’s ability to receive financial aid. Two of the most popular plans are 529 college plans and Education Savings Accounts. With both plans, the account does not have tax penalties, qualified withdrawals are tax-free, and they have little impact on financial aid. There are limits on how much and for how long you can contribute to the plan as well as restrictions on how the money can be used. Other options for long-term savings are: U.S. Treasury Bonds and custodial accounts. Both have some tax advantages but there are restrictions on how the money can be used and they can impact financial aid. With any savings vehicle, it helps to start saving as early as possible.