As we all know, college tuition and other expenses are not cheap, and they’re only likely to keep rising. But there’s no reason to wait until your children get older to start saving money for your child’s college tuition. Starting a college fund when your kids are young is a great way to provide them with a simpler transition into adulthood. Here are four ways to help set them up for success.
Open a 529 Plan
This is one of the most popular options for starting a college savings fund. It is a state-offered plan that is exempt from federal taxes. You can deduct your contributions from your state income tax, and in addition, the funds won’t be taxed when they are withdrawn for college. There are two primary types of 529 plans: a college savings account and a prepaid tuition plan.
The earlier you start a 529 plan, the longer the money has time to increase. However, it’s important not to neglect the account once it is opened, as many parents make the mistake of forgetting to make regular payments, whether that’s monthly, quarterly, or annually. Without regular contributions, the interest on it will fail to amount to much.
Almost every state has its own 529 plan options, and you are not required to use your own state’s plan. If a different state has better investment options for you, you can open one anywhere.
Start a Roth IRA
While a Roth IRA is typically known to be used for retirement savings, it doesn’t necessarily have to be. As long as appropriate contributions are made, it can be used as a method for investing after-tax dollars and protects earnings on your contributions from being taxed as they grow and are withdrawn. One benefit of using a Roth IRA is that even if your children choose not to go to college or use the funds, you’ll already have that money accumulating for retirement.
Get a Coverdell Education Savings Account
Also known as ESAs, these accounts are similar to a 529 plan, yet they have their differences. ESAs are tax-deferred trust accounts in which earnings accumulate tax-free as long as the funds are used for educational purposes. All funds must be used by age 30 in order to avoid any tax penalties, and you are unable to contribute more than $2,000 per year. Another important consideration is that these accounts are only available to families with an adjusted gross income of $95,000 or less (single taxpayers) and $190,000 or less (married taxpayers).
Buy Digital Savings Bonds
Buying a savings bond from the Treasury allows you to redeem and use them for higher education as well as exclude the income from annual gross income for tax purposes. As opposed to an investment portfolio in a 529 plan or ESA, savings bonds are guaranteed by the government and have very little risk, although the interest you can earn is typically much lower.
In order to avoid taking out a large amount of loans and scrambling for financial aid the closer your children get to college age, putting one or multiple of these savings options in place while your kids are young is a wise financial decision. At Republic Bank, we help individuals and families with personal investment options as well as loans to put you on the right track for setting up a successful future for your children. Reach out to us at 800-526-9127 or visit our website to learn more about saving money for your child’s college tuition.