College tuition prices continues to climb, so keeping your child’s future education costs in mind is a smart idea. The sooner you begin saving, the better return you’ll have on those savings. There are different ways to save for college, and they each have their strengths and pitfalls. Planning for your child’s education can be confusing and stressful, but the right plan can keep you on track and help your money grow over time.
If you’re just starting out, there are some important angles and options to consider to help your money work to its full potential.
Here are some options:
A 529 plan is the traditional college savings option, and for good reason. They come with an important mix of benefits, including:
- State and federal tax breaks
- High contribution limits
- Options based on age
- Low impact on financial aid
A college savings 529 plan is typically accepted at most accredited colleges and graduate schools, including professional and trade schools. Contributions apply to education expenses, like books, room and board and tuition, for students attending school at least part-time.
There are no age limits on 529 plans, so grandparents and friends can open a plan as well. If you’re planning on going to school down the line, you can open a plan to save for your own schooling, too.
If you’re sold on a 529 plan, you should know all plans are not the same. Don’t feel like you need to purchase a Fidelity 529 plan or the plan from your state. According to Forbes, some of the better options include the Vanguard 529 Plan, Utah Education Savings Plan or New York 529 Plans for out of staters not satisfied with their own state’s plan. There are countless others, so it’s worth the research to invest in the best one for you.
Roth IRAs are a college savings option because withdrawals for education expenses are penalty exempt. However, they are not income tax exempt unless the account owner is over 59.5 years old. Even if you fall in the correct age gap, there are still some drawbacks to IRAs, including:
- Retirement contributions could decrease because you’re only allowed a certain amount of contributions per year to total IRAs
- Financial aid could take a hit. Once you start taking money out of the Roth IRA, it’s counted as income, and that could affect the following year’s financial aid eligibility
You must own the account for at least five years before withdrawing money or you could be charged taxes and a penalty on the earnings
You may feel nervous subjecting your child’s education savings to any risk, but a little risk over several years could pay off big time. Keeping that money in a bank account and making 1% on it over the years could feel safer, but investing it could yield a return of double or more than a bank account return.
Getting started is the most important step in choosing to save for your child’s future education. Decide when and how much you want to save right off the bat, and from there you can look into the options that will help you feel prepared for that first tuition bill.