How should I save for my children’s college education?

Welcome back to “Ask an Advisor,” the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

This week, for the first time, we’re bringing back a previous guest: the young lawyer who asked about Roth IRAs last week. This time he’s planning not for retirement, but for the children he and his wife hope to have in the next few years. Specifically, he’s wondering how to save for their education. 

The cost of college in the U.S. has more than doubled since the start of the 21st Century. In 2022, the average tuition of a four-year, in-state undergraduate program was $9,377 per year, according to the Education Data Initiative. For out-of-state schools, it was $27,279. And that’s not including all the other expenses students incur, including books, supplies, food and housing. With all that included, the average cost of attending an out-of-state college comes out to $44,014 per year — or $176,056 in total.

So if you want your child to receive a higher education, it’s important to start saving early. Luckily, there are many financial devices to help do this. 

Perhaps the most famous is the 529, a tax-advantaged plan specifically for education savings. Like a Roth IRA, the saver builds this account with post-tax dollars, which can then grow and be withdrawn tax-free — as long as they’re used for educational purposes. Originally, 529s were only designed to cover college and university expenses, but in 2017 they were expanded to include K-12 schooling as well.

There are also other options. A custodial account, for example, is similar to a 529 but doesn’t have quite the same tax advantages — the savings in them do not grow tax-free, but are only taxed at the child’s tax rate. 

And in some cases, a Roth IRA itself can be a good option. Once they turn 59½, a Roth saver can withdraw the funds tax-free — and by that time, their child may be college bound.

So when it comes to saving for college, there are many tools to choose from — which can be both helpful and confusing. Our Westchester lawyer turned to this column for guidance. Here’s what he wrote:

Dear advisors,

What are the best types of accounts or investments to put towards a child’s college fund? My wife and I don’t yet have kids, but our goal is to start having children in the next two or three years. I’m 28, and my salary is $135,000. Combined with my wife’s income, we make a total of about $220,000 per year. We live in Westchester, New York. 

We’d like to get started planning right away. What financial devices would you recommend, and how much and how often should we contribute to them?

—Still wondering in Westchester

And here’s what financial advisors wrote back: