Being a parent comes with a large amount of stress, one of them being the child’s future. When it comes to planning their college career- the earlier, the better. Starting a fund when the child is born will allow for the most opportunity to build a solid amount of money. Fortunately for moms and dads, there are now several options to begin building a post-secondary education fund. Having one account is excellent, but it is workable to hold multiple college savings accounts.
All states and Washington, D.C. have 529 plans. It offers many tax benefits and allows for contributions from family members as well. Whatever funding goes unused can be designated toward another student. A 529 plan is one of the most popular choices for saving because many of them offer state tax benefits.
Education Savings Accounts are another strategy for college savings that have tax advantages for investors. Falling under the 529 umbrella, an ESA allows for withdrawals to contribute to qualifying K-12 expenses in addition to college. A Coverdell Education Savings Account does have income restrictions but can merit contributions from Coverdell in addition to anything the parents contribute.
Custodial Accounts are traditionally used as a supplement to a 529 account. A custodial account is known to cover expenses that a 529 will not. It is important to note that all funds go to the student to use as they please when they turn 18. There is no contribution limit with a custodial account, but it will count as income when determining how much financial aid a student qualifies for.
IRAs come in two types- Roth and Traditional. A Roth IRA is preferable to traditional because the latter will constitute paying income tax on early withdrawals. IRAs must be claimed as an asset on the student’s FAFSA which may affect how much financial aid is received.
There are other lesser-known options such as taking a loan against a 401(K), investing in mutual funds, or contributing to savings bonds. Determining which option is best for one’s child requires weighing the pros and cons. Starting earlier is the one certainty that will result in the most benefits for college savings. Investing in a child’s education will help secure them a successful future.