A Pinch Of Thoughts

Ways To Actually Save Money For Your Child’s College Education

New parents and parents with young children should never postpone saving money for college education. If you have a child and you did not start to save, you should start right now. This is because the later you start, the more difficult it will be to actually meet your goals.

Keep in mind that in the US, in private colleges, the average tuition fee for 2019-2020 was $41,426. This is quite a lot. Even for state colleges, the amount summed up to $11,260. And besides this average, we also have to talk about all the extras needed. In the future, these expenses are only going to get higher.

Every single parent has the right to be worried. Saving money on grocery shopping is not going to do much if you want to have enough to support your child through college. This is why the tips below will be very helpful.

Use A 529 Plan

529 plans are saving plans. They are normally sponsored by the state governments and encourage savings for exactly the covering of future education costs. In most cases, they are tax-friendly as you can deduct contributions from income tax. When you will withdraw money to pay for college, no taxes have to be covered.

Money can be put into the state’s 529 plan. And you can choose the state so you get the best deal. The trick is to set up the account as soon as possible. It is better to start saving as the child is young. This gives more time for the account to grow.

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What is interesting is that you can open your account even with $50. But, you need to keep adding money every single year. In fact, it is preferred to add money every month. The interest you get on all you add will quickly add up.

Use Eligible Savings Bonds

Savings bonds have one advantage few people know. When you redeem savings bonds and you use the money for higher education payments, income is excluded from annual gross income taxes. Some restrictions do apply but if you can buy some savings bonds, it can help.

Savings bonds are fully guaranteed by the US government. This means the risk for the investor is very low. The only downside is that the interest is low. The annual fixed rate at the moment for Series EE bonds is just 0.1%. But, a part of what you save can be put in savings bonds for safety purposes.

The Roth IRA

The Roth IRA is technically meant to help you for retirement. However, it is a great financial vehicle you have access to as a taxpayer. You can invest your after-tax dollars as your earnings and your future growth are shielded from taxes in the future.

As you surely expect, there are both advantages and disadvantages of choosing the Roth IRA. As an example, in a 529 plan, you can have relatives contributing. This is not possible with the Roth IRA. Your financial advisor can help you figure out what the best choice is for you.

The big advantage of the Roth IRA though is that if the child decides they will not attend college, parents will have funds available and put into investments that could then go towards retirement.

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Use The Custodial Account

This revers to savings accounts known as UTMAs and UGMAs. They are kind of the same thing with UTMAs holding assets that go beyond mutual funds, stocks, and cash with the addition of real estate.

You can put as much money as you want into UTMAs and UGMAs. However, this should only be considered when you believe the child is responsible. Children can legally utilize the money inside these accounts as they turn 18. They can use the money for whatever they want, not necessarily college. This is why it is important to take this simple fact into account and decide if custodial accounts are good for your child.

Use Mutual Funds

With mutual funds, you can invest as little or as much as you want. And the money that is gained does not need to be used for college. The only problem is that gains from mutual funds are taxed. All your capital gains are taxed as shares are sold and your eligibility for financial aid is reduced.

Don’t Forget About Permanent Life Insurance

When thinking about life insurance, everyone knows what to expect. But what most people do not know is that you can always opt for the permanent life insurance policy. This I practically a simple life insurance policy. However, a part of your money goes towards death benefits and another part goes towards savings accounts, which are tax-deferred.

How much you safe through this method can be utilized whenever you want to, without any explanation needed. This practically means college expenses are not the only thing you can use the money for. Besides the death benefits, you receive living benefits. And if the child does not want to use the money for educational purposes, you can go for something else.

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Remember that financial aids are possible when you have life insurance policy. This is because your insurance is not considered to be an asset.

Obviously, this type of option is something you should only consider after discussing it with the financial advisor. This is because there are some recurring fees and upfront fees you might not know about.

Home Equity Loans

The family home has equity and you can use it to cover the college expenses of your child. There are many families that are paying down the mortgage and do not create separate college savings plans. The goal here is to use home equity when scholarships and financial aids are not possible.

In so many cases, parents do not think about this option. This is because we are talking about a loan. It practically means you have to pay the money back. But, if you did not prepare in time and you do not have the time needed to use regular options, this is definitely something you want to take into account.