How to Save for Your Child’s College Tuition in 2021
Updated: Feb 20, 2022
The value of college education is of paramount importance for a young person’s success in today’s workforce. If you are a parent of a young child, saving for child education is probably your top most priority right now. But looking for good college savings plans, picking one and then socking money away requires a lot of research and consideration.
From 1989-90 to 2019-20, average college tuition tripled at public four-year institutions while at private institutions, it more than doubled over that period, after adjusting for inflation. With the cost of college tripling over the last few decades, it has left many students under a crushing loan burden.
The surging costs of college tuition has many parents worried about how their child will afford the college of their dreams. It is time to consider which college savings plan can help you save your child from a haunting mountain of debt in the future. It is also the very first step into building a nest egg for your child’s college tuition.
Save for Your Child’s College Tuition : Ultimate Plan
Keep reading this post to find out how to save money for college tuition to give your child the most valuable gift of higher education, a path to their dreams!
A 529 Plan
A 529 plan is a qualified college tuition plan that allows you to save up for your child’s future educational costs while taking advantage of its tax benefits. This savings plan is named after the section of the Internal Revenue Code that governs it.
These savings plans are usually sponsored by state governments and are often tax-friendly. This means that many states allow you to deduct your contributions from your state income tax. So when the time comes to withdraw the money for college tuition, it is not taxed.
Another flexibility that you have with 529 plans is that you can put money into your own state’s 529 or any other state’s plan. Say if you are in Idaho, but like Indiana’s 529 plan better, you can go for it.
Educational savings plans, especially those sponsored by states, are incredibly beneficial when it comes to saving for your child’s education. These plans allow you to open an investment account for your child who can use it in the future for tuition, fees, boarding and other qualifying higher education expenses at any college or university. They also allow you to use up to $10,000 a year for educational expenses before college.
A 529 plan allows you to invest in a variety of assets, including mutual funds or other investing instruments, based on the expected time your child is likely to go to college.
Save for Your Child’s College Tuition : Traditional or Roth IRA
Traditional and Roth IRAs are commonly used tax-advantaged retirement savings accounts. But both can very well be used to accumulate funds for college tuition as well. The Roth IRA allows you to save after-tax dollars and you do not have to pay taxes on the money when you withdraw it. In case you are already over the age of 59 and a half years, you can safely withdraw money for college fees or any other expense.
However, if you are under 59 and a half years of age and have already contributed to the account for at least five years, you can take out earnings to pay for qualifying higher education expenses without having to pay the 10% penalty. This penalty is usually charged if you withdraw money for any other expenses before you turn 59 and a half. The qualifying educational expenses can be for yourself, your spouse, child or your grandchild.
On the other hand, the traditional IRA allows you to contribute pre-tax dollars but you have to pay taxes on the money when you take distributions. With this savings account, you cannot take out your contributions until you turn 59 and a half without paying a 10% penalty.
Coverdell Education Savings Account
The Coverdell Education Savings Account or Coverdell ESA is similar to a 529 savings account. With this savings plan, you can set up a savings account to provide for qualifying educational expenses for someone who is under the age of 18 years. It is a tax-deferred trust account which allows you to pay for elementary, secondary and higher education expenses, including the boarding expense.
In a Coverdell ESA, earnings accumulate tax free and distributions can be taken out free of taxes if the amount is to be used for educational expenses. The money in this savings account can be invested in a variety of instruments. These investment options include stocks, bonds, other assets and the investment grows tax-free.
A stark difference between a Coverdell ESA and 529 plan is that your contributions are not charged with tax. An important thing to remember, though, is that the plan is only available for people who fall under a certain income bracket, that is $110,000 for an individual or $220,000 for a married couple.
A Custodial Account
A custodial account is basically a trust account which is set up for the benefit of a beneficiary. The most common custodial accounts are UGMAs and UTMAs (Uniform Gift to Minors Act and Uniform Transfers to Minors Act). Both accounts are practically the same, except for the fact that apart from holding assets beyond cash, stocks, mutual funds, etc. like UGMA, a UTMA also includes real estate.
A great advantage of using these savings accounts is that there is virtually no limit to how much you accumulate in these accounts. However, an important thing to remember is that these accounts are best for children who are raised with the habit of mindful spending. This is because your child will be legally qualified to use the money in the account for anything once they turn 18.
Majority of the parents in our country plan to pay the full cost of college for their kids, but unfortunately it is even less than 30% who are able to turn it into a reality. The truth is most of the parents are usually clueless as to where to start and as a result, remain unprepared.
The good news is it is never too early or too late to start saving money for your child’s college tuition. In fact, the earlier you start, the better it is. Starting early will not only give more time to your savings to grow over the long term, but it will also help it recover from any dips.
Planning and saving for your child’s college education might be a little stressful but with the Doctor Money app you can have complete control over your future financial goals. Download the app today and help your child find the magical staircase to their dreams and success!