When your kids are young, you’ll want to start saving for their future education as soon as you can. The cost of going to college is increasing every year. According to U.S. News, the average tuition for the 2019-2020 school year ranged from $41,426 for private colleges to $11,260 for state colleges. That price is only the tuition; not including room & board, meal plans, textbooks, fees, and more.
Open a 529 Plan
529 plans are one of the most common education savings accounts. These savings accounts are usually sponsored by state governments and are tax friendly. While you may think you have to use your home state’s 529 plan, you don’t have to. You can pick any state’s 529 plan that works well for you and your financial situation. The contributions you make into your 529 plan can be deducted on your state income taxes and qualified withdrawals are tax free. Additionally, there can be multiple contributors to a 529 plan. If family members want to help you save for your child’s education, they easily can with a 529 plan. The earlier you get started on saving into a 529 plan, the more money can build over time.
Choose a Coverdell Education Savings Account
A Coverdell Education Savings Account is a tax-deferred trust account that can be used to pay for education expenses, including room & board. Earnings accumulate tax free, and distributions are not taxed as long as it is a qualified expense. One caveat to this account is all funds must be used by the time the child turns 30 or you will incur tax penalties.
Save in a Custodial Account
Custodial accounts include UGMAs and UTMAs, which are Uniform gift to Minors Act and Uniform Transfer to Minors Act. The two accounts are practically the same; both can hold assets including cash, stocks, and mutual funds but only UTMAs can hold real estate. There is no limit on how much you can put into a UGMA or UTMA. However, you do want to have a responsible child as the beneficiary. Once the beneficiary has reached the age of majority in their state (18 in most instance), they can legally use the assets in the accounts however they please.
Take out a Permanent Life Insurance Policy
While it may seem like an odd way to save for your child’s college expenses, this is a strategy mainly used by higher net worth families for tax-advantaged savings. A permanent life insurance policy is a conventional life insurance policy where a portion of your premium goes towards a death benefit and another portion goes into a tax deferred savings account. The reason people use this savings vehicle is for the ability to access the money saved at any time for any reason, meaning it is not limited to college expenses. The life insurance policy also does not count as an asset when looking for financial aid from a college.
When looking to save for college, you want to start as early as you can. Instead of taking out loans once your child is in college, use savings accounts that can take away the financial burden of higher education. If you are looking to start saving for your child’s education but don’t know where to start, contact us at Plan A Wealth Management. We can help choose the best options for you and your family. Give us a call today to get started on saving for your child’s future.