What is a good vehicle to do ad-hoc savings for kids' college?

Question

My kids are 11 and 14. I've neglected to save any money for college for them, but I want to start now. I live in Maryland.

I understand that 529 college savings plans are usually the best way to go. They provide a hedge against rising tuition costs. But unfortunately I cannot afford to make the sizable monthly payments for kids of this age.

Instead I would like to sock away money on an ad-hoc basis as I can afford it. That might not be every month. For now, I would like to start by putting away $5000.

What is a good vehicle for me to use? Can I put money away in a investment plan that allows me to deduct the deposited amount from my adjusted gross income? Can I withdraw it to pay their college tuitions without getting hit with penalties, fees and creating tax liability at the time of withdrawal?

Answer 1

Like most US states Maryland has two different 529 options.

• The prepaid college trust
• The College investment plan

Instead I would like to sock away money on an ad-hoc basis as I can afford it.

The Prepaid College Trust is designed to pay for semester chunks. The College Investment Plan doesn't require a large lump sum, or large monthly payments.

The college investment plan works the way you want.

Flexible contribution amounts starting with just $25. Contribute what you can, when you can according to your budget and education savings goals.

You can get get a state tax deduction of up to $2,500 per child per year.

Currently, Maryland taxpayers receive a maximum $2,500 deduction from their State adjusted gross income annually per beneficiary for contributions to the Plans. Contributions made in excess of $2,500 per Beneficiary in a single year may be carried forward and de

Regarding the federal benefits:

Can I put money away in a investment plan that allows me to deduct the deposited amount from my adjusted gross income?

529 plans don't have a Federal income tax deduction, though most have a state income tax deduction. Maryland as discussed above does offer a state income tax deduction.

Can I withdraw it to pay their college tuitions without getting hit with penalties, fees and creating tax liability at the time of withdrawal?

Yes. If the money is used for qualified educational expenses, the growth is tax free.

Answer 2

What is your debt level like? Given some statements you made, you might be better off attempting to free up cash flow (reduce expenses such as consumer debt) so you can cash flow college.

If your children go the community college to university route it will cost you about a car payment per month. Many households have two car payments, one for mom and another for dad. If you can eliminate a car payment in the next 4 years and both in 7 years you should be able to pay for college just from income.