For many parents with children, paying for college is an impending burden that cannot be ignored. You want the best for your children and getting an education is a top priority. However, getting that degree is expensive and many students end up drowning in school debt. You can avoid this kind of fallout by investing in your child’s education early on. But where do you start and what are your options? Here are several tips to help you achieve peace of mind for your child’s future.
529 Plans
Nowadays, these are the most popular plans for saving for a child’s education. Also referred to as Qualified Tuition Programs, you can invest after-tax money into a savings account that you can withdraw from, tax-free, for qualified college expenses such as supplies and tuition. Any accrued gains made in the account are also tax-free.
Almost every state has a 529 plan, but you can invest in another state’s plan if it is more attractive. Many times though investing in your own state’s 529 plan gives you a larger state tax benefit than others. Every plan is different and will charge different operating expenses and fees.
Prepaid College Tuition
With these types of plans, you can lock in today’s rates at a particular university for the future. Currently 270 schools throughout the United States participate in this program. The contribution limits are very high, it grows tax-free, and beneficiaries can change freely. However, your child may not like the chosen school, and you will lose out on any earnings your account gained.
Roth IRAs
Typically retirement savings plan, Roth IRAs have also gained popularity in saving for college. Once again, you can contribute after-tax money that grows tax-free. After five years, you can withdraw money, penalty free, for qualified college expenses. If your child chooses not to attend college or gets a full-ride, then you can use that money towards retirement. However, with any plan there are downsides too. This type of plan has lower contribution limits and excludes high-income earners.
Custodial Accounts
Not as widely used anymore, custodial accounts, or UTMA (Uniform Transfer to Minors Act) and UGMA (Uniform Gift to Minors Act) accounts are like trusts. You can set aside investments or just cash reserves for your child until he or she reaches “the age of trust termination”. Typically between the ages of 18 and 21, your child owns the account and can use the money for college. Unfortunately, the drawback too is that he or she can use the money for anything. If your child isn’t very responsible or mature, it’s probably best to avoid this option. Furthermore, this money (which is now your child’s asset) will affect financial aid qualification.
Involve Your Child
It seems so simple, but yet it can make an impact on your child’s education. Teenagers who are babysitting or at an age where they can work, can certainly contribute to their own future. It may not be a large amount, but setting aside money earned during summer breaks or odd jobs here and there adds up. Those small amounts can pay for books and supplies. It is also a great opportunity to learn money management skills.
Choosing the right option isn’t always straightforward. Combining more than one might be more effective. Or maybe your long-term goals and income situation may play a big role in selecting an option. But the key is to remember to start saving early and contribute regularly. Also be sure to increase the amount you save each year by at least 5%. If need be, consult a financial adviser for professional guidance. Saving for college isn’t easy, but it is possible with a lot of forethought and preparation.
The Fortunate Investor
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