It’s no secret that higher education is expensive. It’s also no secret that those with college degrees achieve greater financial success than those without. If you’re a parent, what are your college saving plan options for your child?
Look at these five ways to save for your child’s educational future.
1. 529 College Savings Plan
A 529 college savings plan delivers a combination of financial aid and tax-relief advantages.
Named for Section 529 of the IRS tax code, this type of college savings plan is sponsored by states, state agencies or educational institutions. Managed by financial institutions, such as College Saving Bank, acquired by NexBank, every state and the District of Columbia sponsor one or both types of 529.
Education savings and prepaid tuition plans fall under the 529 umbrella. Not every state offers both. Education savings plans allow you to invest over time for your child’s qualified higher education expenses. Prepaid tuition plans let you buy units, or credits, at participating in-state public colleges and universities.
Both types offer tax-saving benefits. Both have restrictions, penalties and associated fees as well. Plans differ, but typically, you cannot pay for housing with a prepaid tuition plan. The big plus for prepaid tuition plans is that your investment is protected from stock market downswings.
Education savings plans have a larger potential for growth and provide more flexibility when it comes to acceptable expenditures, including room and board costs. Education savings plan funds offer no fund guarantee against market events.
Money from a 529 has a direct impact on any need-based financial aid when your child goes to college. However, if you begin saving early, a 529 education savings plan leaves your child in better financial shape than if they have to obtain loans and pay them off later.
2. Coverdell Education Savings Accounts (ESAs)
Coverdell ESAs can be used for expenses from kindergarten through college. A broad range of investment options is available as well as the freedom of self-directed investments. Tax-free withdrawals and shelter from financial aid scrutiny make this an attractive option for a lot of parents.
There are contribution, age, and income restrictions when you save through a Coverdell ESA. Although more limited, ESAs may be used in conjunction with a 529 savings plan as long as funds are not used to pay for the same qualifying expense.
3. Qualified Savings Bonds
Qualified U.S. savings bonds are state tax-free and federal tax-deferred. Savings bonds are safe investments backed by the U.S. government. Since 1990, EE and Series 1 savings bonds used for higher education can be redeemed federally tax-free.
The maximum per year investment and phase outs for bonds are generally lower than other types of plans.
4. Roth IRA
Parents who are unsure about their child’s educational future often choose to save through a Roth IRA instead of a dedicated college savings plan. If you use the funds for higher education, early withdrawal penalty fees are typically waived. You have the freedom to withdraw money at any time.
Roth IRAs deliver a wide range of investment options. Not counted as an asset on FAFSA, Roth IRA withdrawals to pay for college expenses are taxed as base-year income.
5. Mutual Funds
There are no limits to what you can spend your money on or how much you can invest when you save with mutual funds. But, you will pay annual income taxes as well as capital gains taxes with the sale of shares.
Helping your child get a career in special education can be rewarding!