Lifestyle, Money Smarts

Tips For Saving Money For Your Child’s College

Saving for your child’s future is something that every parent must do. And they must do it as early as possible. One of the goals is to save up enough money, so your kid can go to college without having to take loans.

This will help them focus more on their education instead of working to pay off their debts. To not burden your child with debt, you need to save at least $35,000 for a private, four-year college. So, what’s the best way to do that? Let’s see.

529 plans

This is probably the most well-known saving plan for a college education. 529 plans are sponsored by the state government and is specifically designed for future education.

This plan uses after-tax money and can only be withdrawn for education purposes for the student listed as the beneficiary. 529 plans are also flexible since people other than the person who set up the account can contribute as well. The money that you’ll withdraw from the plan won’t be taxed too.

Overall, a 529 plan is going to help you save money until your child is ready for college. You are free to use the money you saved for any accredited college. The money can also be used for private school costs starting from kindergarten to high school.

But, there are some cons that you need to know. First, a different state has different rules regarding tax. So, look into it first before opening up a plan. The money can only be used for educational purposes, and you’ll be penalized if you use it for something else. A 529 plan also has no investment options.

Roth IRA

Yes, you can use Roth IRA to save up money for your child’s college education. Roth IRA is great for many taxpayers to invest their after-tax money and protecting their money from taxes forever. Any money that you put in Roth IRA can be used for your retirement too. But remember that other relatives can’t contribute to Roth IRA.

A Custodial Account

This kind of savings account is called Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA). Both are practically the same thing, the differences are UTMA can hold stocks, mutual funds, and so on, and while UGMA becomes accessible once your child reaches 18, UTMA requires your child to reach 21.

It is very important to tell your kid to become responsible with their money since the money is theirs, and they can spend it however they like. You certainly don’t want your child to spend it other than for educational purposes.

Overall, UTMA and UGMA are great for the child’s college education. There’s no limit to how much money you can invest in your custodial account. And the money can be used for anything else.

Mutual fund

Another nice and flexible method is by investing in a mutual fund. You can save as much as you want and for the long term. The money later can be used for anything and not restricted to educational purposes only. Another advantage is you can withdraw the money whenever you want. Also, since there are so many options available, you can always find the best option for your family.

Regular saving account

If you’re looking for the easiest method to save your money, you can always your regular savings account. The 2% interest per year is a nice bonus too. Your money inside the saving account is safe and guaranteed by the Federal Deposit Insurance Corp and credit unions are also guaranteed by the National Credit Union Federation.

This method provides the most flexibility as you’re free to save however much you want and withdraw the money whenever you want. Anyone is also free to contribute to the saving if they want to.

There are some drawbacks of course. The money inside your saving account will be counted toward your and your child’s assets, which can remove the chance of receiving financial aid. And the interest rate is lower compared to other accounts specifically designed for college savings. Also, sometimes flexibility is too much of a temptation for some people.

Start early and save smarter

The earlier you start saving the easier it will be for your family. This way you won’t be forced to save a huge portion of your earnings to meet the target. Also, you’ll get more chances to take advantage of the interests and tax immunity.