Sending your child to college is a goal of many parents. In today’s times, college savings require planning, strategizing, and investing in the right kind of funds and instruments. So what options are there? Here are ways you can prepare your children for higher education.
Determine your needs for your child’s education
The first step in higher education planning is knowing and acknowledging your and your child’s needs. How many children do you have? How many years do you have before they begin college? Where do you want your child to study? Public or private colleges? As a parent, you are constantly asking yourselves those questions. Once you have the answers to these questions, it will be easier to set a savings target.
Do not compromise your financial situation
Once you know your savings target, set a realistic goal and begin your education planning journey. The goal is to plan for college costs without jeopardizing your financial situation simultaneously. As parents, it is natural to place your child’s needs before your own, but you should ideally not compromise on your long-term financial plans, like retirement. You can easily borrow money for college, but borrowing for retirement is tricky and comes with complications and tax-related issues. Setting up an estate plan can help organize your financial future.
When to start saving
When it comes to education planning, time is your greatest asset. It is never too early to start planning for your child’s education. Whether your child or grandchild is just born or is in middle school, the right time to begin saving for their education is now! If you start planning for their education at a young age, you allow your money more time to grow over the long term. You can initially begin saving a small amount and gradually increase your savings rate. Even a small portion you set aside can make a big difference in helping you meet your child’s future needs.
Choose wise mediums to save for their education
One of the most common mistakes parents and grandparents make while planning for their child’s higher education is keeping their money in a regular savings account. Even though it might seem like a safe, logical option, it wastes the value of your money in the long run. The following mediums are great avenues for college savings:
- 529 college plans: 529 are state-sponsored, tax-advantaged plans that allow you to invest after-tax dollars to save for your child’s higher education. This type of account allows your funds to grow tax-free, and your withdrawals are also exempt from taxes, provided they are used to pay for qualified education expenses like tuition, room, boarding, books, etc. If the money is used for non-qualified expenses, a 10% penalty is charged. Each state has different rules for a 529 college plan. Reach out to us if you are in MA or CT for those rules.
- 529 prepaid tuition plans: These prepaid plans help you cover the tuition fees for your child or grandchild, which is the most draining educational expense. In a 529 prepaid plan, you can pay all or a part of the education costs in advance. This helps you avoid the future rise in tuition prices. They also have no income or age limits and offer tax–free growth with high contribution rates. Like 529 college plans, you have the flexibility to choose and change the beneficiary in the future to benefit another child or even yourself.
- Coverdell education savings account: The Coverdell plan functions like a tax-deferred trust. You can contribute after-tax dollars to this account to pay for your child’s college, elementary, and secondary education. Your funds grow tax-free, and you do not pay any taxes at the time of withdrawals. However, the distributions from your Coverdell savings plan can only pay for qualified educational outlays.
- Roth IRA: Apart from using your Roth IRA (Individual Retirement Account) to save for retirement, you can also use it for education planning. You can save after-tax dollars, earn tax-free growth, and get tax-free withdrawals. This triple-tax benefit makes a Roth IRA a wise choice to plan for your golden years and pay for your child’s education.
You can prepare your children or grandchildren for their education in many ways. Contact us today for a free consultation.