As a parent, you know one of the most significant expenses for your children is their college education, so you may want to open a college savings account as soon as possible to cover this cost. The cost of sending your kids to college seems to rise each year, so you may wonder how you’ll ever afford it when it comes. The key is to start saving as soon as possible and be repetitious in your saving habits.
Many programs and college savings accounts are available to help you set money aside for your child’s education. Still, you need to know which program best suits your needs and financial situation. You can be successful with a bit of help.
When to Start Saving for College?
According to USA News, with the average cost of a four-year college running an average of $9,687 per year at an in-state institution, you need to start saving as soon as possible. Whether your child is in diapers or middle school, it’s never too early to begin saving for their future education and goals.
The good news is that there are ways to save and not pay taxes on the money you save. You can start saving as early as possible with whatever amount. And as your child grows older, you can increase the amount you save each week, month, or year in sync with how much money you make. You can even find plans to put money into your savings account when buying everyday items.
Choose the Right College Savings Account for You
You have a unique financial situation that seems to change every few years. You get raises, a new job, or lose one. This makes it essential that you find the correct account to maximize your savings to ensure you can afford to send your children to college.
With so many types of educational savings plans, you need to know the ins and outs of the various plans before making a decision. It’s a good idea to select a couple of savings programs that sound good and then talk with your partner to make a final choice. Here’s a look at some of the most popular education savings plans:
1. Traditional Savings Account
You can open traditional savings account with a small deposit at almost any bank or credit union. Using the same bank where you have a checking account might schedule automatic deductions from your checking to savings.
This type of account allows you to make money from the savings account at any time, usually without a penalty. However, you will pay taxes on any money you make, and you may find that the interest rate is really low.
If you can consistently save and not withdraw funds, you may find that other types of accounts can help you make more money for your child’s college education.
2. UGMA/UTMA Account
The Uniform Transfers to Minors Act (UTMA) and the Universal Gifts to Minors Act (UGMA) make it easier for you to transfer college funds to your minor children without first creating a trust to avoid the tax implications. These types of accounts allow you to place money in them, and then when it’s time for your minor child to start college, you can use the funds to pay their tuition until they become adults.
You can invest the funds in the account and maintain control over them until your child becomes an adult. Then, when your child reaches the age of 18, the accounts transfer to their names.
3. General Investment Account
With a general investment account, you can save for your child by investing in the stock market, mutual funds, and bonds. However, there aren’t any guarantees. For example, you may lose money if you don’t invest wisely. Also, you’ll need to pay taxes if you make money on your investments.
While this is a liquid account, you may pay penalties or brokerage fees if you pull money out. Also, you may find that your stocks or bonds aren’t worth as much when you want to cash out some of your investments. This savings plan is a little riskier than other types, but you can see your money grow if you invest wisely.
4. Education Savings Account
An Education Savings Account is a savings account specifically designed to help you save for your child’s college education. It’s set up as a tax-deferred trust, which means you don’t pay taxes on the money until you need to spend it on educational expenses.
The child must be 18 years or younger to open this type of account, and you can only save up to $2,000 per year for each child covered through the trust. The United States government created this plan to help families plan for their children’s educational futures. However, once you start using the funds to pay college tuition, you’ll need to pay taxes on your earnings.
5. 529 Savings Account
Similar to the Education Savings Account, the 529 Savings Account was also created by the government. However, you can spend as much money each year on it. Also, the funds can be used to pay off up to $10,000 in student loans. You can also use some funds to pay for apprenticeship programs approved by the U.S. Department of Labor.
On the downside, you may need to pay brokerage fees when you set up the investments. In addition, your investments aren’t guaranteed to make you money, so you may lose your investment or see it fluctuate depending on the investment market.
