Saving for your child's college education
Sure, it’s best to start saving for a college education as early as possible. Some parents start when their child is born, which adds up to 18 years of compound interest. But as we all know, life can get in the way. Whether you have 10 years to save for college, or they’re heading off to the university next year, there are things you can do to save and pay for their education.
If you start early enough, a Section 529 Plan, Coverdell ESA, Uniform Gifts to Minors (UGMA), or Uniform Transfers to Minors (UTMA) account, —as well as a standard savings account— work great. They’re safe, easy to open, and even easier to fund. However, some savings options are better suited to college expenses.
The 529 plan gets its name from Section 529 of the Internal Revenue Service code. These tax-advantaged plans are sponsored by the state where you live, have no contribution limits, and deposits can be made while the student is in school. This makes it a good option for families with just a few years until college.
Withdrawals are tax-free when used for college expenses. Plus, saving toward college with a 529 plan means you are protecting most of that money from being calculated as income on your Free Application for Federal Student Aid (FAFSA) application. Be sure to check with your state for possible added tax breaks on 529 plans.
A Coverdell Education Savings Account (ESA) is also a tax-advantaged investment account to help you save for future college expenses. The withdrawals are tax-free when the money is used for college expenses. However, there are contribution limits of $2,000 per student per calendar year. Be careful not to make contributions after the student is 18 or the deposits will incur a 6.00% excise tax.
The UGMA and UTMA custodial accounts are very easy to open and fund. The money or investments you add to the account are held and protected until your child turns 18. Then they can access the account and spend the money on anything they like. That is the drawback. Additionally, UGMA and UTMA assets do count against the FAFSA as income and can limit a student’s aid potential. There are some tax benefits though, as the assets are considered the property of the minor, and therefore taxed at their rate.
First Tech tip: Check with First Tech Insurance services about whole life insurance options and how these accounts can you pay for college.
How much will you need to save for college?
Let’s say the annual cost for college is $15,000. Yes, that’s a conservative estimate. But even with an annual rise in college costs of 1.00%, you’d need just over $60,000 to send your child to school. Over 10 years, that would require a deposit of $500 per month in a qualified account. Doable? Give our college savings calculators a try, including one that answers the question: What Investments Can I Use to Save for College.