Tuition, textbooks, room and board, and transportation are just a few expenses that come along with receiving a college education. This can be very expensive, and if not planned for with enough time, paying for school can be stressful. Parents, have you started saving for your child’s education? If not, now is the time to get started. You can never start saving too early, no matter how young your child or dependent may be. There are savings plans and programs designed to help prepare for the costly side of obtaining a higher education, some of which may even offer college expense or tuition assistance.
529 plans, also known as qualified tuition plans, are designed for both educational savings and prepaid tuition. There are specific universities that accept prepaid tuition plans. These plans allow you to pay ahead for fees and tuition costs at the current price. Although there are restrictions involved, this could help save in future costs.
Another benefit of a 529 plan is that it allows you to save for college while being able to take advantage of tax benefits. Contributions to a 529 plan can be deducted from income taxes. There is no limit to how much you can contribute to your plan within a year. You can also use up to 10,000 a year before college to pay for educational purposes, such as private school. However, keeping your contributions in a 529 plan and letting it grow by continuing to add to it will help make sure you are fully prepared for the future.
A Coverdell educational account is another savings option for educational purposes. This specific savings account can only be set up for those who are 18 years of age or younger. Unlike the 529 plan, there is a limit to how much can be contributed to a Coverdell savings. The contribution limit for this type of savings account is 2,000 per year.
However, the funds in this savings account can be invested in a variety of stocks or bonds to grow tax free. When the money is disbursed from the account and used for educational purposes, the beneficiary will not have to pay taxes on it. If the funds have not been used by the time the beneficiary reaches the age of 30, the money will then need to be withdrawn as taxable income or transferred to an eligible minor under 18 years old.
IRAs for education
Individual Retirement Accounts (IRAs) can also be used to save for college. Although these are mostly used as retirement saving tools, they can be used for many things. IRAs must be established by the individual they belong to, that person must be over 18 years old with earned income, and the money must be used for that individual as well.
With Roth IRAs, you are saving money that has already been taxed. Therefore, you do not pay taxes when the funds are withdrawn. When over the age of 59 ½, these funds can be used for any purpose including paying for school expenses. However, if you need the funds sooner than reaching the age of 59 ½, you can still avoid the 10% penalty rate by applying the withdrawn funds to qualified education expenses.
Traditional IRAs are funds that have not been taxed before they are put away for saving. In this case, you would need to pay taxes on funds taken out. However, like the Roth IRA, you can use the Traditional IRA for educational purposes. These types of investments will not be as beneficial for paying for college as plans like the 529 and Coverdell savings. This is mainly because of contribution limitations, age restrictions, and availability for use. Also, these investment accounts should really be used more for retirement so that you are financially prepared when reaching that stage of life.
There are many savings options to look at when saving for your child’s future. In addition to savings plans, consider looking into community programs that will help save for college. There may also be programs within your child’s school district that offer local college tuition assistance. There may be scholarship programs that offer free college for a certain amount of years. It is useful to use these programs first, before dipping into any savings you have collected over the years. Look into what your child or dependent may qualify for.
Make sure you do your research when saving for your child or dependent’s future. Most often, these accounts or scholarship programs are not utilized because people don’t know they exist. Make sure that you review all of your options to be best prepared for the future. Every parent wants their child to be successful. By diving into saving for their future early, you can help jump start that success. Reach out to your financial institution for more insight on these types of accounts. Also, connect with your child’s school district for information about college assistance programs. Start saving today!