College is expensive and getting stuck with student loan debt can lead to lifelong payments that far exceed the actual cost of college. If you have children or are planning to have children and want to provide them with the best opportunity possible, saving for college should start early. The sooner you begin planning and saving to fund your children’s college tuition, the better. While you can start at any age, when you begin early, your investments will grow exponentially larger. This gives your children more energy to focus on their studies without the anxiety and financial burdens of student loans. To help get you started, here are the top 7 budgeting tips to fund your children’s college tuition.
1. Take Advantage of a 529 Plan
A 529 savings plan is a state college savings plan designed to help encourage financial security for higher education in families. They’re often backed by state governments and are extremely beneficial in terms of tax savings. When you make a contribution to a 529 plan, the money can be deducted from your total income at the end of the year. Then, when you go to withdraw the money for use in tuition payments, the money isn’t taxed. This can help encourage savings early on. 529 plans vary by state, but you can put money into any state’s plan so make sure that you do your research to determine which one works best for you. Since there is a very low minimal contribution to open an account, it’s well worth the effort.
2. Open a Roth IRA
Opening a Roth IRA is a good way to invest in your child’s future. This is often most beneficial for parents who will be old enough to withdraw money without penalty (59 ½), so discuss any questions or hesitations with your financial advisor regarding this option. You can, however, withdrawal up to $10,000 without penalties before you reach 59 ½ if the money is going to be used for education expenses. The benefits of utilizing a Roth IRA to fund your children’s college tuition is that it allows your investment to grow tax-free over the years. If your child chooses not to attend college, you can use the funds for retirement.
3. Invest in Mutual Funds
Mutual funds are a great way to invest for educational purposes without limiting your options in the future. You can make contributions throughout the year without any limitations. You aren’t restricted to use earnings from mutual funds for education, so this is a great option if you’re unsure whether you’ll have children but still want to be prepared. With mutual funds, however, your earnings are subject to annual income taxes. You may also be responsible for any capital gains taxes. If you’re unsure whether mutual funds are the right choice for your college savings efforts, talk to a financial advisor today.
4. Take Out a Permanent Life Insurance Policy
A permanent life insurance policy differs from a conventional policy in that the contributions are divided between death benefit and a savings account. The savings account is tax-deferred, offering a good opportunity to grow your investment. Permanent life insurance savings accounts are not reserved for higher education, giving you more flexibility as your child grows. Since premiums can be higher for these policies, it’s important to discuss associated costs with your financial advisor.
5. Try Coverdell Education Savings Account
A Coverdell Education Savings Account (Coverdell ESA)—formerly an Education IRA—are another option to help you budget and save for your children’s college tuition. While your original contributions are not tax-free, the overall value continues to grow like other investment accounts. Then, when the money is withdrawn from the account and used for specific education purposes, the distribution is tax-free. You will need to designate a specific beneficiary for each Coverdell Education Savings Account and there are limitations to yearly contributions of $2,000. Families with higher adjusted gross incomes are not eligible for this type of savings account and contributions cannot be made after your child turns 18. The savings in the account need to be used prior to your child turning 30 or high penalties are applied to the balance.
6. Utilize Eligible Savings Bonds
When you buy a savings bond, you’re essentially lending money to the government with interest. Different types of savings bonds are used for different things and the earnings from interest or payback do not have to be reported or taxed—unless they’re open for 30 years or longer. You can purchase savings bonds when your children are born and redeem them later to pay for college tuition. There may be some restrictions in utilizing eligible savings bonds, but they’re a good way to budget for tuition with relatively low risk.
7. Put Money in a Custodial Account
Custodial accounts are specific types of savings accounts that can hold a variety of different assets. They can hold different kinds of stocks, mutual funds, cash, and in some instances, even real estate. There are different options for custodial accounts, including the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). The money contributed to this account is not limited to educational purposes, so make sure that you only use custodial accounts when you believe your children will be able to responsibly manage their finances. Whoever is listed as the beneficiary can legally withdrawal money once they turn 18.
To make sure that you’re prepared to help your children finance their education, it’s important to start planning as early as possible. By combining a few of these 7 budgeting tips, you’ll help fund your children’s college tuition and set them up for future financial success. If you have any questions about investing for educational purposes, planning for retirement, or anything else, contact an experienced financial advisor like William Bevins today. To learn more, or schedule a free consultation, call the office of William Bevins today at 615-469-7348.