The college years hold immense potential for both your child and you. Beyond the unforgettable memories, this period offers an education that can shape a rewarding future for your child. However, the journey to college isn’t always straightforward. With each passing year, the expenses associated with this transformative experience rise, presenting fewer assurances for future generations.
The Best Ways To Save For College
If you want your child to reap the rewards a college education can bring, it’s best to plan. Planning for college is the key to being able to afford it! In this article, we share top education savings plans that can help you and your child achieve the goal of having a meaningful higher education without financial worry. Here are some of the best ways to plan and save for college.
1. 529 Plans
529 college savings plans are plans that people are most familiar with as they are dedicated ways to save for college. Money saved using a 529 plan can be used for qualified educational expenses, like tuition, fees, class materials, books, and more, at any accredited college. Using the money for anything other than a qualified expense will result in a tax penalty. Otherwise, you won’t have to pay federal income taxes when you withdraw money from the account. Up to $10,000 of what you save can also be used toward grades K through 12 tuition.
Another advantage of the 529 plan is anyone can make contributions toward it, which means friends and family can gift it to your child or make contributions whenever they want. Every state has its own plan, but that doesn’t mean you’re limited only to the state you live in. Check with your state to learn all the terms of the 529 plan. Compare plans by state.
2. High-Yield Savings Accounts
You could also opt to open a high-yield savings account for college. Compared to other savings options, the growth will be minimal, considering the limited interest that will accrue over time, and it’ll be easy to withdraw from. Have a dedicated account specifically for college. Withdrawing from it frequently or infrequently will result in having to replenish it, which could be a stressful effort, though.
3. Roth IRAs
Most people see Roth IRAs as retirement savings mechanisms, but a Roth IRA isn’t limited to just retirement. It’s also an excellent way to fund your child’s college education. However, if you opt to use it as a way to pay for college, remember that unless your plan has been in place for at least five years, you will have to pay a 10% penalty if you withdraw before you’re 59 ½ years old. Any money you don’t use for college can be used toward your retirement, and keep in mind that contributions are currently capped at $6,500 a year if you’re under 50 years old.
4. Whole Life Insurance
Hopefully, life insurance is included in your financial plan. If it is and you have a permanent, whole-life policy, remember that whole-life policies accumulate cash value over time. If you purchased a policy when your child was young, by the time they’re ready for college, you may have accumulated a nice little savings if it has not been touched.
If you have a whole-life policy accumulating cash value, be mindful of how you use that savings. Be purposeful in its use to ensure it is a useful mechanism for your financial plans.
5. Coverdell Education Savings Accounts (ESAs)
Coverdell Education Savings Accounts, or ESAs, are another tax-advantaged savings option for college. Withdrawals can be made for qualified educational expenses, including elementary, secondary, and postsecondary education. However, it comes with more restrictions and qualifications than anything discussed. Couples and individuals have income limitations, and the maximum contribution per year is only $2,000 until the student’s 18th birthday. Also, the account must be liquidated at age 30.
6. UTMA/UGMA Custodial Accounts
Uniform Transfer to Minor (UTMA) and Uniform Gift to Minor (UGMA) are custodial accounts that can be used for various expenses, including a college education. This plan is a bit more flexible than the 529 and ESA plans in that it can be used for anything. The account automatically transfers to the child at the age of 18 or 21, depending on the state you live in, and they can then use the funds for whatever they want. Since this account will stay with the student when they come of age, remember this will be reported on the Federal Student Financial Aid (FAFSA) form as a student-owned asset.
7. CDs and Savings Bonds
Certificates of Deposits (CDs) and savings bonds are a good option for saving toward a financial goal, including a college education. CDs tend to have good interest rates. The strategy of laddering CDs spreads a lump sum of cash across multiple CDs to get those higher rates in multiple, long-term, or short-term CDs. Mid-range CDs have terms of two or three years. If using CDs, it’s good to use the strategy of having multiple CDs with various terms.
Series EE and I bonds also offer tax benefits when they’re used for the purpose of education and protect your investment from inflation.
8. Educational Trusts
Before there were 529s and ESAs, there were educational trusts. Trust accounts can be structured as UTMAs or UGMAs and transferred to the student’s account at a certain age (either 18 or 21), depending on the state. They can use the funds for anything they want when they come of age. As with the UTMA/UGMA custodial accounts, this will be reported as a student-owned asset on the FAFSA.
The Bottom Line
There are plenty of options when it comes to saving for your child’s college education. Take the time to research the various options available to you to decide which one(s) would best fit your needs. Also, remember that the sooner you start (the younger the child), the better your savings outcome! Initiating a college savings plan early maximizes your potential savings and allows you to take advantage of compound interest, giving your investments time to grow and flourish.
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