Saving for a Child’s Education – What is Your Plan

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It seems that no young adult is prepared to enter the workforce these days without a college degree. Education is one of those invaluable gifts that every parent wants to give their child, but when that child turns 18, education suddenly becomes quite expensive, especially for parents with an aspiring Ivy League student!

So, the key is to start saving now. Invest in your child’s future today, and you won’t have mixed feelings about their acceptance to Yale down the road. You’ll be thrilled and have the peace of mind that you can indeed afford for your child to get that precious college education. But what are the steps to saving for your child’s education?

The first step is to estimate the cost! Not only will there be the cost of tuition, but since your young scholar won’t have room in their schedule for a full-time job, you’ll likely need to help them pay for housing and other expenses, unless they are staying at home and enrolling in an online university. And what about books and school supplies?

It really starts to add up. This is why the earlier you start saving, the better. So what are you waiting for? Your child isn’t getting any younger!

While higher education is not cheap, putting away some pennies now won’t hurt your bank account later. Let’s discuss two savings accounts specifically designed to help you pay for your child’s education.

A 529 Plan

529 plans, commonly known as college savings or tuition prepayment plans, are available in every state.
The money parents put into a college savings plan is typically invested in mutual funds, but here’s the nice twist: there is no federal tax on it! As long as the withdrawals you make are related to education expenses, including books, you won’t have to worry about those pesky taxes. Additionally, you can use a 529 plan to fund your child’s education at any type of university or college—whether it be private, public, or even a trade school. 529 plans don’t expire once your high-achieving college student enters a graduate program.

As for prepaid tuition accounts, any family member can contribute to the balance, not just parents. A prepaid tuition account simply grows at a fixed interest rate, so even as college tuition rates increase, the 529 plan will keep up.

There are limits, though relatively liberal, on how much a single parent or married couple can contribute to a 529 plan annually. It’s important to research these limits.

Keep in mind that there are risks associated with a 529 plan. An investment in mutual funds, even a conservative one, is not guaranteed to be as lucrative as you might like. Another downside to the 529 plan is that if your child benefits from one, they may not qualify for other sources of financial aid.

The Coverdell Education Savings Account

Coverdell Education Savings Accounts (ESAs) work similarly to prepaid tuition plans, as any family member can contribute. However, there are key restrictions. While withdrawals are tax-free when made appropriately, the contributions are not tax-deductible. Additionally, no more than $2,000 can be contributed each year, and contributions can only be made between kindergarten and 12th grade. However, the saved funds can be withdrawn until your child reaches age 30.
Furthermore, tuition for both private elementary and secondary schools can be covered with an ESA.

One important note about the ESA is that there is an income requirement. If your yearly gross income exceeds $110,000 as a single taxpayer, or $220,000 as married taxpayers, you will need to ask another family member to contribute to the account.

There are plenty of accounts like this, and many ways to save and invest money. The key is to invest intelligently and start saving and investing as early as possible. If you know you’re saving for your child’s education, why not take advantage of the great tax benefits?

But if you didn’t plan ahead, you can still avoid financial headaches. If your high school student takes advantage of the many college scholarships available, they may secure a full ride to the university of their choice! Encourage good grades and carefully plan with your child, regardless. Of course, good grades should be encouraged anyway!

So, invest in your child’s future and ultimately America’s future by tucking away a few dollars today. It can make all the difference. It may be challenging to save for both your retirement and your child’s education, but it is possible and definitely worthwhile.

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