How To Save for Your Kid’s College: Tips from Financial Experts
Do you wonder how to save for your child’s college in advance?
Welcome to the club!
These days college is one of the parents’ main worries. As college costs have increased by 169% since 1980, and student debt has become a $1.6 trillion crisis, it’s no wonder that parents look for long-term options to help them deal with this all-important issue.
Keep reading to learn when it’s an excellent time to start saving for your child’s education, how to save for college, and the best options available for you right now.
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TABLE OF CONTENTS
- Is It Time To Start Saving for Your Kid’s College?
- How To Save for College
- Find the Best Option That Works for You
Is It Time To Start Saving for Your Kid’s College?
Well, it’s never too early to start a college plan for your kids or start looking into ways to save money for your child’s college education.
But, first, you need to know that people often talk about the best college savings plans for babies!
Yes, for babies!
It’s hard to believe that people with babies are already saving for university—but it’s happening. So, if you have children over the age of one, it’s definitely a good time to start figuring out the best way to save for their college education.
No need to worry if you haven’t started yet. You still have options. But keep in mind “the later you start, the more important it is to weigh tax implications.”
My best advice in a nutshell? Look at 529 plans, Coverdell ESAs, and saving bonds—these won’t cause a tax hit for you in the future.
Below, I explain in detail each one of these options.
How To Save for College
Knowing how to save for your child’s college tuition isn’t as straightforward as saving for your retirement. College costs vary over time, and they also depend on which university your child wants to attend.
What’s more, while there are different plans available, there aren’t any clear guidelines for college savings. In fact, a Fidelity Investments survey found that 69% of parents wish there were more specific guidelines on how much to save.
So, let’s take it step by step and figure out the best way to save for college.
What Is a College Fund?
A fund “is a pool of money allocated for a specific purpose.” In this case, that specific purpose is paying for your children’s university.
The $2,000 Rule of Thumb
Fidelity Investments came up with a helpful rule of thumb: multiply your child’s age by $2,000. Or, to put it differently, every year, you must save $2,000 for your kid’s college education. This simple rule will let you “cover half the average cost of a four-year, public university.”
To follow this rule, you can open a child college savings account.
However, you must understand that this is just an approximate projection based on past trends in college costs.
Also, this rule by Fidelity assumes that you have a 529 plan, which I’ll explain below.
The 529 Plan
This plan is “an investment account that offers tax benefits to pay for qualified education expenses.”
Nowadays, you can choose from a wide array of 529 plans, as there are over 100 different types of this plan, each one adapted to a variety of education options.
One of the main benefits of having a 529 plan is that it’s very “tax-friendly.”
You get state income tax deductions and state tax credits. In addition, you can withdraw the money tax-free and even use it as an estate-planning vehicle.
Mutual funds aren’t one of the most popular options to save for a child’s college because they aren’t explicitly designed for that.
However, if properly managed, they can be an excellent option.
Let me explain.
Mutual funds are companies “that pool money from many investors and invest it in securities such as stocks, bonds, and short-term debt.”
Some of the benefits of using a mutual fund are:
- There’s no limit to how much you can save
- You can spend the money on anything you want,
- There are over 10,000 mutual funds available today
Qualified U.S. Savings Bonds
People consider U.S. saving bonds one of the safest investments today because the U.S. government issues them.
In theory, an investor in this bond is guaranteed a return. However, as it’s a safe investment, the return tends to be smaller than other options.
Some of the benefits of using U.S. savings bonds to pay for college education are:
- They’re “federally tax-deferred and state tax-free”
- They’re considered to be an ultra-safe investment
On the other hand, one of its main cons is that you can only save $10,000 per year, or $20,000 per year, as a married couple.
Many consider Coverdell ESA the best option to save for your kid’s college education.
The Coverdell Education Savings Account (ESA) is a “tax-deferred trust account that can pay for elementary, secondary, and higher education expenses.”
One of Coverdell ESA’s main appeals is its flexibility.
You can use it to pay for college and other levels of education, and you can also choose your investments, something that isn’t allowed in The 529 Plan, for example.
Roth IRAs are retirement accounts that let you contribute “after-tax income to earn interest tax-free.” However, many people use them to pay for college, as this expense is considered untaxed income to the beneficiary.
Also, due to its tax benefits and wide range of investment options available, it’s now popular among parents looking for clever ways to pay for college.
So, get aboard!
Find the Best Option To Start Saving for College
There are a few other options to save for college. However, parents in your situation most often chose the ones I shared with you.
Plenty of choices exist.
There are plans specifically designed to pay for college costs, such as the 529 Plans and the Coverdell ESA. Other options were designed as investments or savings, such as mutual funds or U.S. savings bonds, but can be used to pay for your kids’ education.
Some options are remarkably safe. Others offer more flexibility. In comparison, many others may offer greater returns but with more risk.
As with every investment, deciding which one is the best option depends on your situation. So reach out to your financial advisor, find the best plan for you, and start saving for college.
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