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Alternatives to College Savings Plans
Posted By Ron On June 7, 2012 @ 7:16 AM In College | Comments Disabled
Though investing in a college savings plan is typically the most efficient and cost-effective way to save for college or other education-related expenses, it’s not the only way. The most popular alternatives are:
Though you should be aware of these alternatives, it’s crucial to understand their pitfalls and limitations as education related funding sources.
Uniform Gift to Minors Accounts (UGMAs) allow any adult to set up a savings account  for any minor beneficiary (anyone under age 18). UGMAs have several tax advantages:
Though UGMAs offer more favorable tax treatment than regular taxable investing accounts, they don’t match the opportunity for tax-free earnings and withdrawals that college savings accounts, such as 529 plans, can offer.
IRS rules allow retirement account owners to withdraw funds from and 401(k)s without penalty when these funds are used for qualified higher education–related expenses. Even so, it’s best to avoid spending any retirement savings on education expenses, since doing so could jeopardize your ability to retire.
If you absolutely must withdraw from an IRA retirement account to pay for education-related expenses, always withdraw first from your traditional IRA as opposed to your Roth IRA plan. Withdrawals from Roth-style retirement accounts, such as Roth 401(k)s and Roth IRAs, require you to pay regular income tax on the account’s capital gains at the time of withdrawal, which compromises the main advantage of investing in a Roth IRA—tax-free withdrawals.
Taxable investing accounts are ordinary investing accounts in which you buy stocks, mutual funds, and so on. Though these accounts offer the most investment options and grant the account owner complete control of the account’s assets, they don’t offer the advantages of college savings accounts, namely favorable tax treatment and prepayment of tuition.
Home equity loans allow you to borrow money against the equity you’ve built up in your home—the difference between what you owe on the home and its current market value. Though the interest you pay on a home equity loan is tax-deductible, usually it’s best to avoid using a home equity loan to fund education-related expenses, since these loans offer none of the benefits of college savings accounts.
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