First Gen American asks:
I would love a post on savings bonds as a vehicle for college savings…pros and cons vs 529. Also is one better for high earners. There seems to be some language about earning limits on the tax deductability of the earnings but no penalty if not used for educational expenses.
Disclaimer: We are not professional financial planners. Before making important financial decisions, talk to a fee-only financial planner with fiduciary responsibility and/or do your own research.
According to this page from the treasury:
For single taxpayers, the [education] tax exclusion income limit [for savings bonds] is an adjusted gross income of $92,550 and above. For married taxpayers filing jointly, the tax exclusion income limit is an adjusted gross income of $146,300 and above.
So to me that says that savings bonds are not a good vehicle for college savings for high earners. Maybe if they’re the kid’s and the kid is not filing as a dependent, but that seems risky too given how FAFSA and CSS heavily weight the kids’ savings (exceptions here).
Savings bonds are also a less risky, lower earning asset. Given the lack of tax advantages for higher earnings and current interest rates, they’re not much better than CDs or high interest savings accounts for low-risk low-earnings savings and will also show up in financial aid decisions.
So… for both high and low earners in the “may get some financial aid” range, the best thing to do with your money is to put your savings in places that won’t count against your financial aid– so fill up retirement accounts (especially IRA Roths if you can since you can take out the principal on those in case of emergency), pay off credit cards, put money in home equity below what CSS forms pick up, fill up your HSA, and so on. (Forbes magazine is probably the best place to look for these kinds of limits/suggestions.) That may seem counter-intuitive that the best way to save for college is to hide money in ways that it is more difficult to tap for college, but financial aid is powerful and you can take out (short-term) loans for college but you can’t take out loans for your retirement (and taking out loans for your mortgage can be expensive and problematic).
AFTER you’ve hidden as much as you can, I still think the 529 in a state that either gives you a state tax break or, failing that, a state that has good Vanguard options with low fees is your best bet. You could also do a Coverdell if your income is low enough (<220K in 2017 and 2018), but they’re not really any better than 529s unless you have private K-12 tuition that it could go towards, and the limit is pretty small.
If you are too high income to qualify for financial aid (and note that that income may be higher than you think) then you don’t need to play games hiding your income and savings because there’s not anything you could do to get things low enough for colleges to pitch in. It may also be worthwhile in this case to push some savings onto the child so as to take advantage of the child’s lower income. If you’re in this situation, don’t just read free advice from the internet– pay for a fantastic fee only financial planner with fiduciary responsibility and get all of your financials in order.
High earners and grandparents cutting down their estates may want to look into frontloading 529s with 5 years worth of 14K gift exclusions or, if they don’t want to force the money to be used for college, they can look into a gift trust.
How are you saving for kids’ college (if applicable)?