I know it is hard to imagine your tiny little baby being an 18 year old heading off to college, but believe me it will happen one day. That day will come faster than you think too. Since we know the day will inevitably come it is important to plan for it. A college education is becoming more expensive every year. By 2024 the cost for a 4 year degree will range from $161,463 to $331,059, depending on if you child goes to an in-state public university, and out-of-state public university, or a private university. Compare that with today’s average costs of between $67,091 and $137,562 and you quickly realize just how quickly the cost of a post-secondary education is going up. A good education for your child is certainly not a cheap thing making it all the more necessary to start an educational savings plan early. Frankly it makes me want to start saving before I even become pregnant!!
There are many ways that parents can save for their child’s post-secondary education. Here are a few of the options available and some helpful links to help you get started.
Qualified Tuition Program (better know as 529 Plans): 529 plans allow you to invest larger amounts of money than other savings plans, and come with the added benefit that the withdrawals are free from federal income tax as long as they are used to pay for qualified education expenses. There are two types of 529 Plans, pre-paid tuition where you buy credits at a school you select from a list created by the State (basically it buys tuition at a state university based on today’s tuition costs), and savings plans that allow you to invest money and earn interest to help pay for future education expenses. The savings plan offers you more freedom of choice of schools. Here are some helpful websites with more information regarding 529 plans.
Coverdell Education Savings Account (formerly known as the Education IRA): this account allows you to build tax-free earnings to be used towards education expenses. You are limited to contributions of $2000 per year. The earnings grow tax-deferred, and the withdrawals are tax free if used for qualified education expenses. You do not have to have an income (some other plans require you to be employeed) to make contributions to the Coverdell so this is a great way for grandparents to make a contribution to their grandchildren’s education. Also the account owner can decide if they will control the funds or if the student will have the control. Here are some helpful websites with more information on Coverdell Education Savings Accounts.
UTMA (Uniform Transfers to Minor Act): The UTMA allows adults to act as custodians and open accounts for a minor. There can only be one custodian and one minor per account. These accounts can impact a child’s ability to get financial aid since it will appear as income for the child, so keep that in mind. These accounts are not tax-free or tax-deferred, they are subject to tax liability. However, it would be in the child’s name and social security number meaning the tax rate is much lower. Here are a few helpful websites with more information on UTMAs.
It is important to consider your specific situation when trying to decide on an educational savings plan that is right for you. Determine what contributions you will be able to make, which plan will provide the best outcome for your child (and you), and how the investment will impact your own tax liabilities. It is probably a good idea to talk with a financial advisor or someone else with knowledge in that field so you can get a better understanding of your options.
Education is a valuable asset for your child, but it is also an expensive one. Any contributions you can make to an educational savings account on their behalf will help them pay for that valuable asset. The information above is about tuition costs and education savings plans in the United States. If you don’t live in the United States and are wondering about what options are available for you and your family, you may want to speak with a financial advisor. Here are few helpful links I found for Canada, Australia, and England that should provide some helpful information for those readers.
Please share any pointers or suggestions that you think would be helpful to others. We can all learn from each other’s experiences.
(sources American Century Investments, IRS, Get Ready for College)