Saving For College

Tips on how to start saving for your child's college education.


Disclaimer: This post has been written for educational purposes only by Park Slope Parents and is not meant to be financial advice and should not be construed as financial advice or be relied upon. The post may contain errors, inaccuracies and/or omissions. You should always consult a financial professional for specific advice.


There are several great websites that cover plans for saving for college. Three continue to come up on posts to the PSP site.

These sites have all the information you need to compare plans and have your questions answered. Many PSPs also recommend asking a financial advisor if at all possible to help you wade through all the information.

Following is information excerpted from the websites listed above:




ABLE ACT's 529 PLAN (for children with special needs)




 FAQs from the website:

What is a 529 plan?

It's an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant (Section 529 of the Internal Revenue Code).
529 plans are usually categorized as either prepaid or savings, although some have elements of both. Every state now has at least one 529 plan available. It's up to each state to decide whether it will offer a 529 plan (or possibly more than one), and what it will look like. Educational institutions can offer a 529 prepaid plan but not a 529 savings plan (the private-college Independent 529 Plan is the only institution-sponsored 529 plan thus far).

Why should I invest in a 529 plan when I can't be sure that my child will attend a public university in my state?

There's a misconception that state-sponsored 529 plans are only geared to families that send their children to a state school. That's just not true. There are two general types of 529 plans: prepaid programs and savings programs. The states offering prepaid tuition contracts covering in-state tuition will allow you to transfer the value of your contract to private and out-of-state schools (although you may not get full value depending on the particular state). If you decide to use a 529 savings program, the full value of your account can be used at any accredited college or university in the country (along with some foreign institutions). You can look up eligible institutions on the Education Department's school code search page.

What's so great about 529 plans?

You're looking at four main advantages.
First, you get unsurpassed income tax breaks. Your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free. This treatment applies for distributions in the years 2002 through 2010. Unless Congress decides to extend this tax break, qualifying distributions made after 2010 will be taxable to the beneficiary (earnings portion only). Assuming that the student isn't earning hundreds of thousands of dollars running a dot-com company out of her dorm room, you should still save taxes with her lower income tax bracket. Your own state may offer some tax breaks as well (like an upfront deduction for your contributions or income exemption on withdrawals) in addition to the federal treatment.
Second, you the donor stay in control of the account. With few exceptions, the named beneficiary has no rights to the funds. You are the one who calls the shots; you decide when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. (However, the earnings portion of the "non-qualified" withdrawal will be subject to income tax and an additional 10% penalty tax). Compare this level of control to a custodial account under the Uniform Transfers to Minors Acts (UTMA).
Third, a 529 plan can provide a very easy hands-off way to save for college. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). Then you can relax and forget about it if you like. The ongoing investment of your account is handled by the plan, not by you. Plan assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager. You won't even receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals. If you want to move your investment around you may change to a different option in a 529 savings program every year (program permitting) or you may rollover your account to a different state's program provided no such rollover for your beneficiary has occurred in the prior 12 months. (There is no federal limit on the frequency of these changes if you replace the account beneficiary with another qualifying family member at the same time.)
Finally, everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $230,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions. Thinking about going back to college or graduate school in the future? Then set up a plan for yourself! There is no reason why you cannot be the beneficiary of your own account, although some investment firms do not presently allow you to do so.

What happens if my child doesn't go to college or if I simply end up with more in the account than he needs for college?

Federal law imposes a 10% penalty on earnings for non-qualified distributions beginning in 2002. The penalty is not assessed on principal. An exception to the penalty can be claimed if you terminate the account because the beneficiary has died or is disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship.
You can change the beneficiary to another qualifying family member at any time in order to keep the account going and avoid (or at least delay) taking non-qualified withdrawals when the original beneficiary doesn't need those funds.

Gift and estate tax advantages with 529 plans.

The gift and estate tax treatment of an investment in a 529 plan is a good news, bad news situation.
The bad news is that your contribution is treated as a gift to the named beneficiary for gift tax and generation-skipping transfer tax purposes and so you need to be aware of this exposure particularly if you are making other gifts to the beneficiary during the same year.
The good news is that your contribution qualifies for the $11,000 (in 2003 and 2004) annual gift tax exclusion and so most people can make fairly large contributions without incurring the gift tax.
The better news is that if you make a contribution of between $11,000 and $55,000 for a beneficiary, you can elect to treat the contribution as made over a five calendar-year period. This allows you to utilize as much as $55,000 in annual exclusions to shelter a larger contribution. The money (and the growth of your account) gets out of your estate faster than if you made contributions each year.
And the best news is that the asset leaves your estate but doesn't leave your control. This is a truly remarkable benefit when you compare it to the "normal" gift and estate tax laws. Anyone who is being advised to reduce their estate tax exposure through gifting, but cannot stand the thought of irrevocably giving away their assets, can now have their cake and eat it too. Of course, if you later revoke the account its value comes back into your estate. Your estate will also have to include a portion of any contribution made with the five-year averaging election if you don't live past the fourth year.


Will a 529 plan affect my financial aid? 

Yes, but it's important that you know exactly to what degree. See link below for a more detailed answer:




What’s so great about the Coverdell education savings account?

Under the "old" tax law, not too much (despite the lure of tax-free income). In 2002, the Coverdell education savings account became a very attractive college savings vehicle for many people, including families that wish to save for elementary and secondary school expenses. In fact, even if you like the 529 plan you may still decide to contribute the first $2,000 of savings for each child into a Coverdell account.
There are still some items to be aware of, however, such as the following:
There are certain eligibility requirements in the year you wish to contribute to the Coverdell account, which means that not everyone will find them useful. For example, the age limits mean that older adults with college plans may not be eligible.
In 2002, the contribution limit increased from $500 per child to the much more reasonable level of $2,000. However, you need to be careful accounts established by different family members for the same child do not cause total contributions to exceed $2,000 or else a penalty will be owed.
The relatively low contribution caps mean that even a small annual maintenance fee charged by the financial institution holding your Coverdell education savings account could significantly affect your overall investment return.
Your contribution goes into an account that will eventually go to your child if not used for college. You cannot simply refund the account back to yourself like you can with most 529 plans. This means you lose some degree of control.
The Coverdell education savings account is on equal footing with the 529 plan when applying for federal financial aid. The account is considered an asset of the account custodian, typically the parent. Withdrawals are not reported as student or parent income as long as it is tax-free for federal income taxes.
Coordinating withdrawals with other tax benefits, especially the Hope or
Lifetime Learning credits, can be tricky. The 2002 changes are certainly an improvement over the 2001 rules, but you still need to pay close attention.
The same situation applies to a 529 account starting in 2002.
The account must be fully withdrawn by the time the beneficiary reaches age 30, or else it will be subject to tax and penalties. The rules are somewhat confusing and the tax forms are complicated. The new tax law will not be much help here. In fact, even the 529 plan will become more difficult to handle on your tax returns beginning 2002 because of the changes.

So how does it work?

If you know how a Roth IRA works, then you have a pretty good idea of how an Coverdell education savings accounts works. They both allow you to make an annual non-deductible contribution to a specially designated investment trust account. Your account will grow free of federal income taxes, and if all goes well, withdrawals from the account will be completely tax-free as well. You will need to meet certain requirements in the years you wish to make the contributions, and in the years you take withdrawals. (More on these Coverdell education savings account requirements later.) But a Coverdell education savings account is an investment vehicle targeted to education expenses, not to retirement.


THE COVERDELL SAVINGS ACCOUNT (account information from

The Coverdell Savings Account (Formerly The Education IRA) allows single taxpayers with an adjusted gross income of up to $95,000 annually and married couples filing jointly with an adjusted gross income of up to $150,000 annually to invest as much as $2,000 per year, per child (under 18) in an Education Savings Account. The contribution limit is phased out for married couples filing jointly with adjusted gross income between $150,000 and $160,000, and all others with adjusted gross incomes between $95,000 and $110,000.
This non-deductible investment can be made in addition to your $2,000 contribution to a traditional or Roth IRA. Investment earnings grow income tax deferred, and funds can be withdrawn federal income tax-free to meet qualified educational-related expenses. Prior to opening an Education Savings Account, do keep in mind that it generally must be distributed or rolled over to another eligible family member by the time the beneficiary reaches age 30. Otherwise, all investment earnings are taxed as ordinary income and subject to a 10% tax penalty.
Contributing to and receiving distributions from an Education Savings Account may also impact your eligibility for state tuition programs, education tax credits and scholarships. Qualified Education Savings Account distributions may be subject to state and local taxation. Consult your accountant or tax advisor for more information.



Here are some FAQs from the website that will help guide you. But remember to do your own research and ask a financial advisor for help if you can:

Who can invest in New York's 529 College Savings Program Direct Plan?

New York's 529 College Savings Program Direct Plan is open to any U.S. citizen or resident alien who has a valid Social Security number or taxpayer identification number. You must have a valid residential address that is not a post office box. The person on whose behalf you're opening the account (the beneficiary) must also be a U.S. citizen or resident alien with a valid Social Security number or taxpayer identification number. There are no income restrictions or state residency requirements.

Does the money have to be used at a college in New York State?

No. The money from your account in New York's 529 College Savings Program Direct Plan can be used to pay for tuition, fees, books, room and board, supplies, and other qualified higher education expenses at any eligible post-secondary school in the United States and abroad. This includes most colleges, universities, graduate schools, and vocational schools.

What is the minimum initial investment to open an account?

The minimum contribution to open an account in New York's 529 College Savings Program Direct Plan is $25. The minimum for subsequent contributions is $25 ($15 through payroll deduction).

How much can I contribute to my account?

You can contribute on behalf of a beneficiary until the total balance of all Program accounts held for the same beneficiary reaches an aggregate maximum balance which is currently $235,000. If there's more than one account owner contributing for the beneficiary, this is the total for all accounts. Once this limit is reached, you can no longer make additional contributions but you can continue to accumulate earnings.

Are contributions tax-deductible?

New York State taxpayers can deduct up to $5,000 of contributions to their Program account ($10,000 for a married couple filing jointly) on their state income tax return each year. However, contributions are not deductible for federal income tax purposes. Learn more about the tax benefits of New York's 529 College Savings Program Direct Plan.
(Note: To be deductible for the current tax year for New York State income tax  purposes, contributions sent by mail must be postmarked by December 31.)

What are my investment choices?

New York's 529 College Savings Program Direct Plan offers 15 investment choices—three age-based options that automatically adjust your assets over time to more conservative allocations and 12 individual portfolios that you adjust yourself according to your own investment strategy and risk tolerance. You can select up to five investment options per account.

How do I find information about the performance of the portfolios?

For up-to-date information on the performance of the investment portfolios available through New York's 529 College Savings Program Direct Plan, see the Investment Performance section of our Web site. (You can also click "Investment Performance" on our homepage.) To see up-to-date information on your specific Program investments, log on to our (UPROMISE) Web site. You can view your most recent account balances, as well as online versions of your quarterly statements.

Can I open an account for more than one beneficiary?

Yes. While you can only name one beneficiary for each account, you can open accounts for different beneficiaries. Each account you open requires a $25 initial investment.
Note, the same individual can be the beneficiary of multiple accounts. For example, a father, mother, grandparent, and uncle of the same child can each open separate accounts for the same beneficiary, and can also open separate accounts for another beneficiary.
What if the beneficiary doesn't go to college? You may leave your money in the account in the event that the beneficiary decides to attend college at a later date. You may also name another eligible family member as beneficiary on the account and use the 529 assets to pay for that person's education. If no eligible family members can be named beneficiary, then you may choose to close the account and earnings will be subject to federal income tax and an additional 10%  federal income tax, as well as state and local income taxes.

Can I move money from one investment option to another?

Yes. Under the federal rules governing 529 plans, you can change the way your existing assets are invested once per calendar year or whenever the account beneficiary changes. You can change how your future contributions are allocated at any time.

Can I transfer money from another 529 plan to New York's 529 College Savings Program Direct Plan?

Yes. Generally, you can transfer your assets for the same beneficiary from an account in one state plan to an account in another state plan without federal tax consequences if the rollover does not occur within 12 months from the date of a previous transfer to any 529 plan for that beneficiary. However, there may be state income tax consequences (and in some cases state-imposed penalties) resulting from such a rollover. You can also transfer money from Education Savings Accounts, Uniform Gifts/Transfers to Minors (UGMA/UTMA) accounts, and U.S. Savings Bonds to your Program account. Documentation of principal and earnings from these investments is required.

Can I open an account in New York's 529 College Savings Program Direct Plan with the money from my child's UGMA/UTMA account?

You may use money from a Uniform Gifts/Transfers to Minors (UGMA/UTMA) account to open an account in New York's 529 College Savings Program Direct Plan, but keep in mind that you may incur capital gains taxes from the sale of the assets currently held in the UGMA/UTMA account. Since any money gifted to a child in an UGMA/UTMA account is irrevocable, the 529 should be opened as a separate "UGMA/UTMA 529" account. You should consider opening a separate 529 account for the same child if you wish to make additional contributions of non-UGMA/UTMA money. Any money that you contribute to the "UGMA/UTMA 529" account will be considered owned by the child and you will not be able to change the beneficiary of this account.

Can I open an account in New York's 529 College Savings Program Direct Plan online?

Yes, you can open an account online and fund it by electronic bank transfer, check or money order, payroll deduction (if available through your employer), or by a rollover from another college savings vehicle. Once you open your account, you can manage your account online, including making additional contributions, changing personal information, and receiving quarterly statements and transaction confirmations online.



This information is from the website:

Low initial investment amounts:

You can start with as little as $25. You can contribute by check, automatic investment, electronic bank transfer, payroll deduction (if available through your employer), or by moving assets from other college savings vehicles.

Low fees:

Your only expense is a management fee of 0.58%, one of the lowest of any 529 plan.

Federal income tax advantages:

Your assets grow tax-deferred and earnings on your withdrawals are exempt from federal income tax when used for qualified higher education expenses.*

Additional advantages for New York State taxpayers:

Withdrawals are exempt from New York State income tax when used for qualified higher education expenses. New York taxpayers can also deduct up to $5,000 of contributions ($10,000 for a married couple filing jointly) on their state income tax return each year. If you are a resident or taxpayer of the another state, you should consider whether that state offers a 529 plan with tax advantages or other benefits that are not available through this Program.

Unlimited account access:

You can open and manage your account online and choose to receive account statements and transaction confirmations online through

Broad eligibility:

The Program is open to all U.S. citizens and resident aliens with a valid Social Security or taxpayer identification number. You can use your account to pay for tuition, fees, books, room and board, and supplies at any eligible post-secondary school in the United States and abroad.

Fifteen investment options by The Vanguard Group:

Choose from three age-based options that adjust your assets over time to more conservative allocations as your beneficiary nears college and 12 individual portfolios that you adjust yourself according to your own investment strategy and risk tolerance. You can select up to five investment options per account.

Higher contribution limits:

You can contribute on behalf of a beneficiary until the total balance of all Program accounts held for the same beneficiary reaches an aggregate maximum balance which is currently $235,000. If there's more than one account owner contributing for the beneficiary, this is the total for all accounts.

Gift tax advantages:

You can contribute up to $55,000 in a single year ($110,000 for a married couple filing jointly) for each beneficiary without incurring federal gift tax provided you don't make any other gifts to that beneficiary for five years.

Experienced management:

The Program is managed by Upromise Investments Inc., with investment management and account services provided by The Vanguard Group.



Is you child special needs? There is a special savings plan just for you. It's a relatively new piece of legislation called "The ABLE Act: A 529 Plan for Children with Special Needs." It is also inclusive of children on the autism spectrum.

What is it? According to the National Resource Center:

"ABLE Accounts, which are tax-advantaged savings accounts for individuals with disabilities and their families, were created as a result of the passage of the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014 or better known as the ABLE Act. The beneficiary of the account is the account owner, and income earned by the accounts will not be taxed. Contributions to the account, which can be made by any person (the account beneficiary, family, friends Special Needs Trust or Pooled Trust), must be made using post-taxed dollars and will not be tax deductible for purposes of federal taxes; however, some states may allow for state income tax deductions for contributions made to an ABLE account."



·        New York has made several changes to its 529 plan, including changing the offerings and changing the investment manager, from TIAA CREF to Vanguard. The NY plan is now, in my view, one of the best in the country (although I am not a financial advisor so that is a layman's opinion).

·         If you can afford a financial advisor, by all means get one.

·         The other thing you should know is that while relatives cannot contribute to a 529 you set up, they simply write a check to you to do it, or, if they want the tax break, they can set up their own 529 for your child. All they need is her/his name and SSN.

·         NY State 529 Program is very easy to use via the internet but keep in mind that only the benefactor can contribute so you would have to have family cut checks to you and then deposit them in the name of our on/daughter.

·         The other advantage of the NY State 529 plan is that you can deduct the contributions from your NY State Tax Return.

·         You also don't have to use the money saved to go to a New York state college either. Your kids can go anywhere! has a link to Upromise. I know if I had to be trusted to write a check every month to my kids' college funds, it would probably have nothing in it. With direct deposit, they take care of it for you.

·         We love  It is very flexible and you can do auto payments from your bank account monthly, and make deposits whenever you like.  I believe there is a way to hook in other family members. 

·         It's really worth looking into the tax sheltered options, such as the Coverdell or 529 plan, but be aware that the rules for taxes on the 529 option "expire" around 2010. If you're concerned about the tax treatment long term, the Coverdell may be a better option although I don't think that you can contribute as much to that plan as you can to the 529.

·         Also with the 529 plan, each state has a different set of rules so if you're parents/grandparents are out of state they should look into what is available in their home state -- they may be eligible for tax breaks.  Be aware of the fees involved with the various options -- they can add up.  NY has as far as I know 2 options, one of which is a Vanguard managed 529 Plan and this management firm is known for keeping expenses low.  The website for information on that is

·         It's always a good idea to get the official scoop on taxes, so try the IRS site  Search on "QTP" (qualified tuition program) or "Coverdell"