Stand up on college savings vehicles

Another school year is drawing to a close — so if you have young children, they’re one year closer to the day when they head off to college. And both you and your children need to prepare for that day. Your kids can do so by developing good study habits. As for you, it’s never too soon to start preparing for the high costs of higher education.

Just how costly is college? According to the College Board’s figures for the 2012-13 academic year, the average cost for one year at an in-state four-year public school is $22,261; for a private school, the comparable expense is $43,289. And if college costs continue rising faster than the general inflation rate, these figures will increase substantially in the years ahead.

Of course, it’s entirely possible that your kids will receive some scholarships or grants, which can significantly lower your out-of-pocket price tag. Nonetheless, it’s probably a good idea not to count on your offspring getting a “full ride” to school — which means that you may want to start exploring college-savings vehicles.

Fortunately, you have some attractive options, one of which is a 529 plan.

When you contribute to a 529 plan, your earnings accumulate tax free, provided they are used for qualified higher education expenses. (Keep in mind, though, that 529 plan distributions not used for qualified expenses may be subject to federal and state income tax and a 10% IRS penalty.) Furthermore, your 529 plan contributions may be deductible from your state taxes. However, 529 plans vary, so be sure to check with your tax advisor regarding deductibility.

A 529 plan offers other benefits, too. For one thing, the lifetime contribution limits for 529 plans are quite generous; while these limits vary by state, some plans allow contributions well in excess of $200,000. Plus, a 529 plan is flexible: if your child, grandchild or other beneficiary decides against college or vocational school, you can transfer the unused funds to another family member, tax and penalty free.

While a 529 plan may be a good choice for building resources for college, it’s certainly not the only choice. For example, a Coverdell Education Savings Account, like a 529 plan, can generate tax-free earnings if the money is used for higher education expenses. However, you can typically only put in a maximum of $2,000 per year to a Coverdell account.

Another college-savings possibility is a custodial account, known as an UGMA or UTMA, which offers some tax benefits, no contribution limits, and may have an impact on financial aid. You might also consider investing in a zero-coupon bond that matures just when your child is ready for college. Unlike other bonds, you won’t receive regular interest payments with a zero-coupon bond, but you purchase it at a deep discount, so you might find the affordability factor to be worth considering. (Be aware, though, that even though you don’t actually receive the interest payments annually, you’ll still be liable for the taxes on them, so before purchasing a zero coupon bond, consult with your tax advisor).

Whichever college-savings vehicles you choose, try to put them to work as early as you can. Before you know it, today’s first-graders will be tomorrow’s college freshmen.

Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway, in Fallon.