Chapter 12 - QSTP vs. Other Investment Alternatives

There are many different strategies and financial products available to the family seeking to save for future college costs. Besides the tax-qualified programs discussed above – the Education IRA and Series EE bonds – a number of other investment choices and forms or ownership have become popular over the years. While they may not all be directly and exclusively geared to college savings, their features can make them adaptable for this purpose. This chapter will discuss several of these options in comparison to a QSTP.

….The changes made by Congress now allow an IRA withdrawal to be taken without penalty if used to pay qualified higher education expenses of the taxpayer or the taxpayer’s spouse, child or grandchild. Qualified higher education expenses are reduced by any amount excludible from income on the redemption of qualified Series EE savings bonds.

….This is a wonderful change for families. Many individuals have assets in individual retirement accounts and it is nice to know that those assets are there not only for retirement, but also in the event they are needed for college expenses.

….For most families, the Roth IRA is not the total solution to saving for college, not to mention the fact that use of the Roth IRA for college means it will not be there for retirement. A QSTP will likely still provide the best means to save for a large portion of future college expenses.

….There are three main advantages typically cited for the use of taxable stock mutual funds as a college savings vehicle as opposed to a QSTP. They are (1) potential for superior investment performance, (2) ability to direct the investments, and (3) lower capital gains taxes. Each of these factors is examined below.