A question financial advisors like to ask is: “what part of your retirement savings is designated for college?”.  The goal of the question, of course, is to get you thinking about specific savings, rather than saving in general.  Advisors like different baskets because it makes planning easier.  I have retirement accounts that are for retirement.  I have a savings account that is for a down payment on a house, or second house, or car.  The college fund is for college.  Back to school is a good time to think about this account.

Saving for education is easy.  Unlike retirement or savings, there are only two real choices for college saving, two accounts specifically designated for education.  Of course, you can use IRA funds for college, and you can use other savings for school expenses.

Section 529 of the Internal Revenue Code allows you to invest in a 529 plan, the proceeds of which can be used tax-free for a qualified higher education, which includes most US universities and many international ones as well.  Most expense are covered, including tuition, room and board, books and supplies, and more.  There are contribution limits and the goal is to invest in a manner that will result in gains that can be used tax-free.

The Education Savings Account (ESA) is the other account.  It can also be used for college, but it can also be used for primary education.  There are contribution limits, currently $2,000 per year, which is not a lot, and there are income limits that have to be considered.  While $2,000 per year will not pay for 18 years of private school, the ESA does have many uses.  For example, if you start early enough, you can pay for private high school with the ESA.

It turns out that even public school is really expensive.  ESA’s can be used to cover books and other school materials or activities that are either provided by the school or required by the school.  There are a lot of these and they add up.  These expenses were not a part of my budget when my kids started school.  I am using the ESA’s to cover them and am able to stay on track with my financial plan, including my retirement savings and 529 savings.

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