5 Ways To Save For Your Child’s College Education
College tuition is expensive and out of reach for most families in America. The worst part is that fees keep increasing every year. Most families take out thousands of dollars in student loans each year to cover the cost of education. Although it’s almost inevitable, there are ways to save for college that can help reduce your debt and prepare your child for success.
So what is the best time to start saving for your child’s college education? The sooner the truth, the better. There is no need to wait for your child to reach high school. Start this savings plan when your child is in kindergarten. The earlier you open a savings plan, the more money your child will have when they need it, and the less they will need to borrow.
5 ways to provide college education for your child
Here are some options to consider when looking for a college savings plan. Some of them also offer significant tax benefits.
#1 Open a 529 plan.
The 529 plan is the most popular choice among parents looking for a college savings plan. The 529 plan is very flexible and offers many benefits. These plans encourage you to save on education expenses while taking advantage of tax benefits. It doesn’t take long to get started either. You can open an account with as little as $25 and then increase this amount as your financial situation improves. The important thing is to keep pumping the 520 into your child, preferably every month, to get the benefits.
The 529 plans are generally sponsored by state governments and specific terms may vary from state to state. You can put the money into any 529 state plan that you think works best for you. Many states allow you to deduct your contribution from your state income tax. When money is withdrawn for college, it will also be tax deductible.
There are two types of 529 plans – education provisioning plans and prepaid education plans. Make sure you understand how each works so you can choose the one that works best for you.
#2 Deposit money into a custodian account.
A guardianship account is a type of savings account that you open on behalf of a minor. All money deposited into the account with interest accrues to the minor, who gains legal control of all assets upon reaching the age of majority (this may be age 18 or 25 depending on the state). As an adult, the beneficiary can use the money for anything, not just educational expenses.
There are two types of guardianship accounts – UGMA (Uniform Gift of Minors) and UTMA (Uniform Transfer of Minors Act). Both are almost identical except for one difference. Both accounts can hold assets in the form of cash, stocks and mutual funds, but only UGMA can hold real estate as an asset.
The advantages of trust accounts are that there is no limit to the amount you are allowed to contribute, and the funds can be used for any purpose. The downside is that you don’t get any tax benefits on your contribution. Another downside is that money is reported as student assets at the FAFSA. This could negatively affect their eligibility for need-based financial assistance.
#3 Open a Coverdell Education Savings Account.
A Coverdell Education Savings Account from Coverdell ESA is a type of tax-deferred trust account. It allows you to create a savings account for the nominal beneficiary. The money can be invested in a variety of assets such as stocks and bonds and grow tax free.
The funds can be used to pay for eligible educational expenses. Eligible expenses include all primary, secondary, and tertiary education expenses, from tuition to room and board.
The main advantage of the Coverdell ESA is that the income accrues tax-free. Assets are exempt from income tax only if they are used for educational purposes. Taxes apply if funds are used for non-educational purposes.
Coverdell ESAs have several limitations. This plan is only available to families who earn less than a certain income. The maximum contribution to each account is $2,000 per year and contributions must stop when the beneficiary turns 18. Also, the beneficiary must use all funds by the age of 30. Any money left after this age is subject to tax penalties.
#4 Start a Roth IRA.
Although these are primarily retirement accounts, they can also be used as ways to save for college. Starting a Roth IRA is a great way to invest your after-tax dollars, while protecting your income and assets from taxes. The important thing is to make sure the account is set up correctly.
Like any other college savings plan, there are pros and cons to opening a Roth IRA.
The advantage is that funds are held in relation to how they are used. If your child decides not to go to college, you can use the money you set aside for your retirement.
The downside to a Roth IRA is that other relatives cannot contribute to the savings plan.
#5 Open a traditional savings account.
A traditional savings account is a slow but sure way to invest your disposable income. You open a savings account in a bank in your child’s name and deposit money into it whenever you have spare cash. Any cash gift your child receives can also go into this account.
The advantages of a savings account are that it is a risk-free investment and the funds can be used for any purpose. There is no maximum amount invested, when the funds can be withdrawn or how they can be used. The downside is that the interest rate is the lowest compared to any other type of investment.
There’s no reason not to start saving for your child’s college education today. College may seem far away when your child is young, but time passes quickly and before you know it, it’s time to pay for college. The earlier you open any type of college savings plan, the more you save. When it’s time to pay for college, you’ll be glad you started today.