How To Save For Your Kid’s College Expenses
Creating a college fund for your kids can be a great way to help them avoid crippling student loan debt. It might be hard to think about theirs while you’re still paying off yours, but use that as motivation.
The cost of tuition isn’t going down anytime soon. It can seem intimidating to save up all that money for college. Although saving for your kid’s college can seem expensive, the important thing is to start, so here are some methods to help get the ball rolling.
When Should I Save For College?
While saving money for your child’s education is an admirable goal, don’t neglect your own finances. It might not be ideal that you or your child needs to take out loans to pay for college, but there can be alternatives, like applying for grants and scholarships. Besides, if you don’t take care of your own finances first, how can you expect to take care of someone else’s?
Before figuring out the best way to save for college, you should take a few steps to tend to your money first. This includes making paying off your high-interest debt a priority, setting up an emergency fund to cover unexpected expenses and stashing money away toward retirement funds.
Once you’ve got a good handle on that, it’s time to think about your child’s college funds. The earlier you start, the better. Of course, it’s not always possible, but every little bit helps. Consider automating your savings as well — think designating a specific amount from our paycheck each month to an account of your choice.
How Much Do I Need To Save For College?
When figuring out how to save for your kid's college fund, think about how much you want to set aside to help. As in, do you want to fund half or a small percentage of tuition? Getting clear in your commitment now can help you determine an amount to aim for.
There are calculators that help estimate how much it’ll cost by the time your child’s ready to enroll — the college cost calculator from The College Board is one such example. From there, you can see what approximate costs are and work out much you’ll need to set aside in savings to reach your goal.
What Is The Best Account To Save For College?
There are no shortages of college saving accounts for your child. Each option has its pros and cons based on your individual situation. In other words, there isn’t one best all-around account.
Here are some of the more popular options for parents to choose from:
Roth IRA – Yes, it is a retirement savings account, but this tax-advantaged vehicle can be used for college savings. You contribute post-tax dollars and you can withdraw any investment gains penalty-free after five years to pay for eligible educational expenses. As of 2019, you can contribute a maximum of $5,500 per year (plus an extra $1,000 if you’re older than 50) and there are income limits.
529 College Plans – Also known as a Qualified Tuition Program, 529 plans allow you to put after-tax money into an account and withdraw funds to use for qualified educational expenses tax free. There can be different requirements, maximum contributions, investment options and fees for your state (if it offers one), so check the fine print.
Coverdell Education Savings Account – This account is similar to a 529 college plan in that your funds generally receive tax-advantaged benefits if you use it for qualified educational expenses. The main difference is that you can use it to cover K-12 expenses, not just costs associated with college.
Prepaid College Tuition Plans – You can use these accounts to pay for part of your child’s college tuition now. That way you can pay current prices and avoid expensive tuition hikes. Not all states offer these plans, so check to see what’s available.
What Happens To A 529 Plan If It’s Not Used?
In most cases, if your child doesn’t use the funds for qualified expenses, then you could face tax penalties and fees if you withdraw your cash. However, you can transfer the account to someone one else, like another child. There are also exceptions such as if your child meets the IRS’ definition of eligibility — in this case you can roll it over to an ABLE account which can help your child save money without it affecting their Social Security benefits.
Saving for your kid’s college expenses isn’t exactly a walk in the park. But with some careful planning, you and your child can find the means to pay for a large expense that could alter the trajectory of their career. For more articles like this one, visit our learning center for personal finance content.
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