College Savings Tips for Physician Parents

December 8, 2014

Although there are many ways to save for a child's college education, I recommend that my clients consider these two methods.

A common concern in physician families is the cost of educating children. Indeed, this represents perhaps one of the greatest lifetime expenses for a family, especially with more children, and most especially if a private college and/or graduate school is included.

I have advised families that have spent well over a million after-tax dollars to educate their children (meaning 150 percent of that amount in taxable earned income).

To make it simple, there is no better way to save for college than with 529 college savings plans. There are actually two types of such plans:

1. Prepayed state tuition. This option is only available in certain states, and it allows the family to prepay tuition (and often some dorm expenses) with a guaranteed sum up front. The younger the child, the less the payment. If the child does not go to a state school, the money is refunded, often with a modest set of earnings. The advantage of prepaid tuition is that you are able to guarantee a return on investment equal to the rate of educational inflation, which is traditionally higher than routine inflation.

2. True college savings plans. More common are true college savings plans in which you deposit after tax money which is invested in various types of customized or "automatic" portfolios. The earnings are all tax free as long as they are withdrawn for educational purposes such as:
• Tuition
• Room and board equal to what the college would charge (a dorm room and meal plan)
• Equipment
• A computer, if required, and Internet access fees
Note that you are not saving any money on current taxes, but you are also not pay taxes on the growth of the funds in the plans. Technically, the funds should be withdrawn to refund your outlays for the above costs in any given calendar year. You can take withdrawals for a given calendar year until three months into the next year as well. Note that if you have money left over when one child finishes school, you can transfer the plan to another child.
These funds are asset protected in most states, yet are still technically "owned" by the parent or grandparent. The funds can actually be pulled back to the owner if not used, although there will be taxes and a 10 percent penalty assessed on the earnings.

Although there are other ways to save for education such as the Coverdell Educational IRA, there is no other method I'd recommend other than the 529 plan types mentioned above.

Every state has these plans, and many are very low cost. Avoid broker sold plans and do-it-yourself. The portfolios are often automatically adjusted by the student's age by the plan, so why pay a broker thousands of dollars to do nothing?