One of the many things parents worry about is being able to afford their child’s college tuition. You want to be prepared to give them the best possible future and for that, you need to start preparing as early as possible.
Getting started on preparing for this huge expense can be daunting, but the good news is there are many different ways to save up for your child’s college tuition.
1. 529 Plans
There are several 529 plans available and they all serve as a vehicle for you to put money away that’s specifically for your child’s college education. Every 529 plan available will have a different annual fee and operating costs. They usually offer tax advantages, such as earnings that are not subject to federal tax similar to say, an IRA.
It’s worth noting there are two types of 529 plans that are particularly advantageous for parents who are saving for their children’s college education. There are prepaid tuition plans and education savings plans.
Prepaid tuition plans allow you to prepay the costs of college credits at the current prices. So, if the prices increase by the time your kid goes to college, you will have saved money. Check out the list of universities and colleges that participate in this kind of 529 plan and figure out, along with your child, which one is best.
This type of plan comes with a few drawbacks you should be aware of. For one, prepaid tuition plans don’t allow you to use the funds you’ve saved for anything but tuition costs, so you won’t be able to pay for room and board with that money. Second, these plans often come with residency requirements and they may not be guaranteed by the Federal or State Government, which means your funds are at risk. In addition, the number of states offering these plans is dwindling.
The other 529 option, Education savings plans, allow you to put your money into an investment account where it will grow without taxes. There are many approaches to this and the one you choose will be determined by the amount of risk you’re willing to take. These plans allow for more inclusive expenses, so you’ll be able to pay tuition and other fees such as room and board, computers, books, supplies, etc., and they don’t have residency restrictions.
2. UTMA and UGMA Accounts
Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) accounts are custodial accounts that work exactly as a trust for your children. If you have assets that you want to reserve for your kids when they’re older, putting them into these accounts is the best way to make sure they get these assets.
The only downside to this is that colleges take this into consideration when deciding how much to provide for your child. In other words: if you have a lot of money in the account, colleges won’t provide much financial aid. But if that’s the case, you won’t need the financial aids anyway. We advise you to discuss whether UTMA and UGMA accounts are a good move for you with a professional financial adviser!
3. Coverdell Education Savings Account
The Coverdell Education Savings Account is another kind of custodial account, the difference is these are meant specifically for college education. The one drawback to this is that you can only put $2,000 into the account each year, nothing more. Of course, how much of a drawback this is will depend on your financial situation. If it’s challenging for you to put aside $200 or $500 a year for your child’s college, this limit might not bother you.
This kind of limitation is what makes 529 plans the most popular option when it comes to saving money for your children’s education. The limits on those plans are much higher, from $200,000 to $500,000 and that’s an advantage for many parents out there.
4. Taxable Investment Accounts
A taxable investment account is a brokerage account that’s created using after-tax money. This means the money in the account is taxed, but you can use it for anything you want. This option offers the most flexibility, but it’s not highly desirable from a tax point of view. There are ways to eliminate capital gains taxes, but it can be complicated and you’ll definitely require the help of a professional tax or financial adviser so they can come up with the best possible strategy.
The advantages of taxable investment accounts include: greater flexibility because the money can be used for college or other financial goals. You can enjoy potential tax advantages by transferring assets to your child, but you’ll need professional help to figure it out. And also, there are no contribution limits.
5. Get Your Child to Contribute
It’s not wrong to ask for your children to pitch in, so if you’re willing to do that, it’s another great way to save up for their college education. You should teach your children about handling money responsibly from an early age. The sooner you teach them how to work for it, the value of it, and how to save it, the better. It will contribute to them becoming financially smart and responsible.
If your children are making their own money, whether babysitting, working at a fast food restaurant, selling crafts online, etc., you could talk to them about saving some of their money for college. This isn’t always feasible, but when it is, you can suggest they break up their earning into three categories: weekly expenses, short-term goals (getting a PS5 when it comes out) and long-term goals (college). This is the kind of approach that will teach them about responsible budgeting, which will help them for the rest of their lives.
Any of the options on this list will help you put money aside for your child’s college education, starting today, so you don’t have to worry about it later on. Consider each option carefully and determine which one is best for you!