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Paying for college

Chris Farrell Jun 3, 2011

Question: I’m an active-duty Air Force officer, and my wife and I are debating college-savings strategies for our son (1 yr old) and any other kids we have down the road. I plan to serve enough time so that I can transfer my Post-9/11 GI Bill benefits, however with multiple kids, obviously the benefits won’t cover everyone fully. So, with at least partial tuition coverage guaranteed, does it make more sense to build up extra college savings in a middle-of-the-road type of mutual fund with flexibility for how we spend the proceeds (in the event the kids get scholarships), or go for a 529 despite the lack of a clear idea of how much we’ll really need (even with the tax benefits)? Thanks! Joseph, Prattville, AL

Answer: How about this approach? Put the bulk of the college savings money into a broad-based mutual fund investment with the remaining going into the 529 college savings plan.

With this strategy college savings is simply part of your automatic household savings program. You’re creating a long-term financial margin of safety for your household. You can draw on the savings when the time comes to pay for college if it makes sense. The strategy gives you a lot of financial flexibility.

At the same time, there’s no question that the tax-advantages of a 529 savings are attractive. The savings grows tax-deferred and when you withdraw the accumulated savings it’s free of federal taxes so long as it goes toward qualified educational expenses. Qualified educational expenses include a wide range of expenses, such as tuition, mandatory fees, books, supplies, equipment, and personal computer.

Putting a sliver of savings into a 529 for each child provides a nice foundation for college savings. The other thing I like about opening up a 529 is that it’s a nice way for family members and relatives to contribute into at holidays and celebrations as a gift.

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