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Dear Carrie, 

Help. I have three young children ages 2, 5 and 10, and haven't started saving for college for any of them. Is it too late?

—A Reader 

Dear Reader,

Of course it's not too late. Your children are still young—even with a 10-year-old you have almost 12 years to save counting the four-plus years your child may be in college. On the flip side, there's no time to waste since college costs seem to be growing right along with your kids.

And as important as it is to start saving for college, it's equally important to be strategic about how you do it. From tax considerations to investing to understanding financial aid formulas, there are ways to get more mileage out of your money.

Set a realistic monthly savings goal

First, don't get discouraged by the high cost of college. There are many ways to pay for education. In fact, according to the 2014 national Sallie Mae study, How America Pays for College, parents' income and savings cover only about 30 percent of college expenses.

So determine what you can realistically afford to put towards education each month. You can try using an online calculator to help you estimate how much your savings can grow over time. Then, after you explore college savings accounts, you might consider apportioning funds to each child according to their age and the years before they'll enter college.

Choose a tax-smart account

There are two tax-advantaged choices for education savings—a 529 College Savings account and a Coverdell Education Savings Account (ESA). Both provide tax-free growth potential as well as tax-free withdrawals if the money is used for what the IRS has determined to be qualified education expenses (tuition, fees, books, room and board, etc).

I favor a state-sponsored 529 account. There's no annual contribution limit and the lifetime limit per beneficiary is upwards of $300,000 depending on the state. While you don't have to choose your own state's plan, some states offer a partial or full state income tax deduction if you do, so always consider your own state's plan first.

Another plus is that anyone—parents, relatives and friends—can contribute to a 529. In fact, anyone can open a 529, so your children could potentially benefit from more than one account if, for instance, a grandparent wanted to help you save.

For the record, if you think your child will attend a public in-state school, there are also prepaid 529 plans that allow you to pay for tomorrow's tuition at today's rates. The details go beyond the scope of this column but it could be worth looking into. A good source of information is

An ESA offers similar tax benefits but has an annual $2,000 contribution limit, plus income limits for opening one. On the positive side, while 529 withdrawals can only be used for post-secondary education expenses, an ESA can be used for certain elementary- and high-school costs. You could have both types of accounts to cover all your bases.

Whatever your choice, ideally you'd open a separate account for each child—and set up automatic monthly payments.

Be aware of gift tax rules

Contributions to education savings accounts are subject to gift tax rules, which currently require that any annual individual contribution over $14,000 ($28,000 per couple) to a single beneficiary be reported on your tax return.

However, a special gift tax exclusion allows an individual to contribute a lump sum of up to $70,000 ($140,000 per couple) to a 529 Plan. This is treated as a five-year gift, so any gifts beyond this amount to the same beneficiary during the five years would be subject to the gift tax.

Invest aggressively in the early years

Once you've set up accounts, consider investing for maximum growth potential, especially for your youngest children. Of course, you have to be careful about the investments you select and maintain a close eye on their performance, but investing more aggressively when the kids are young can potentially result in better returns over time.

A 529 account may offer a choice of investment portfolios, some of which are designed to automatically become more conservative as your child approaches college age. With an ESA, investment selection is up to you.

Understand what affects financial aid decisions

Assets in either a 529 or an ESA belong to the parent or other adult account owner, so there's minimal impact on financial aid. Only 5.64 percent of a parent's assets (excluding retirement accounts and home equity, which are not counted at all) are considered available for college expenses, as opposed to 20 percent of a student's assets.

However, distributions from 529s other than one set up by a parent are considered income to the beneficiary. Fifty percent of a student's income is considered available for college expenses, so a withdrawal from a 529 set up by a grandparent could potentially affect a student's financial aid eligibility. As kids approach college age, it can sometimes be better for others to contribute to the parents' 529, or simply make a direct payment to the school.

Get started

Talk to your financial institution about the 529 plans they offer, and check into your state's plan. is another good resource for more in-depth information. And don't delay. Your kids will be looking at college brochures in no time. I know from experience!

Have a personal finance question? Email us at Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries contact Schwab.

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You've Inherited an IRA—Now What?

Important Disclosures



The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

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