You'll need to test these ideas if you need money for a college fund for your children.
If you're a newlywed or have children who are just starting, they'll be looking to do something right today: start putting money in a college savings account. The existence of a college savings fund for your children is the best way to prepare your child for a life of success as an adult.
As you know, doesn't come affordable.
In an annual U.S. News survey conducted in 2022, tuition costs for 2022-2023 were $39,723 (for private universities) and up to 10,423 (for public and in-state schools). If nothing changes with how students pay for their higher education, costs for college continue to rise.
If you're thinking of strategies to help save to go to college, there are a few options:
Create a 529 plan.
Make sure you invest your money in eligible savings bonds.
Try a Coverdell Education Savings Account.
Start a Roth IRA.
Put money into a custodial account.
Invest in mutual funds.
You can take out a long-term Life insurance plan.
You can take out an equity loan for your home.
Open a 529 Plan
You're likely familiar with 529 plans. They're among the most well-known and effective methods to create an education fund for your children. Savings plans, which the state government typically runs, help you save money for future expenses. They are often tax-free in the sense that many states let the contributions be deducted from your income tax for the state, and when you take funds for your college education, you won't have to pay taxes.
It is possible to put money in the state's 529 or any other state plan. Just like snowflakes, the states' plans differ. However, if you're in Idaho and like Indiana's plan more, go with it.
It is important to start your account earlier rather than later. "It's never too late to start saving for education, but we encourage parents to start saving when their children are young. The more time the account has to grow, the more money kids will have available when they need it for education," states Laura Morgan, vice president of communications, legal, and savings for College Foundation Inc. This umbrella nonprofit organization manages the state of North Carolina's NC 529 plan.
Most of the time, it only needs a little to start. For instance, in NC 529's situation, Morgan says you can create an account for just $25.
The most important, of course, is to continue contributing to your child's 529 yearly, most likely each month. If you don't, the amount of interest this $25 will not add up to in the coming 18 years.
A typical mistake parents make is setting up a 529 only to forget to pay it off, in the opinion of Steve Azoury, owner of Azoury Financial. This financial complicated in Troy, Michigan, NY, helps plan your finances. "It is recommended that you make the monthly deposits to the account so that it isn't a problem. Also, you should inform your loved ones about your plan, so in the event of the holidays or birthdays, you can make payments to the plan," Azoury says.
Andrew Wood, a retirement plan advisor at Daniel A. White Associates in Middletown, Delaware, thinks many parents put off establishing an account with a 529 plan.
"With education costs continuing to climb, the time value investing is vital," Wood declares. "You should invest the first time that compoundes over time and with interest. Don't wait until it's too late."
However, Wood insists that "time is also important on the back end."
If your children are approaching their college years, you must be aware of your 529 plan and ensure it's properly set up according to him. Also, you want to avoid coming near the end of the road and using the funds to fund college, which could mean losing a large amount of cash due to an unlucky day on the market.
"As you prepare to use the money for educational expenses, you should review the level of risk in the plan. If you need funds within the next few months, you'll need to look at reducing the risk." Wood says.
Put Money Into Eligible Savings Bonds
Another way to create a college savings fund for your kids Is to buy savings bonds electronically at the Treasury on TreasuryDirect.gov. The bonds are no longer available as paper.
"The income earned when redeeming them can be excluded from their annual gross income for tax purposes if they use the money for higher education, excluding room and board," Says Ryan Eyerman, a certified financial planner with E&M Consulting in Westlake, Ohio.
"This is, of course, subject to certain restrictions," Eyerman states.
The benefit of investing in your savings bonds is that they're backed by the federal government and carry virtually no risk. The downside is that your rate of return can be very modest. Individuals who own Series EE savings bonds are paying a fixed annual rate of 0.10 percent. The Series I savings bonds pay a compound rate of 9.62 percent, with a small section adjusted to the inflation rate every six months.
Try a Coverdell Education Savings Account
An ESA, or Coverdell Education Savings Account, is a tax-deferred trust account designed to assist families in paying for elementary, secondary, and higher education expenses including room and board. "Earnings accumulate tax-free, and distributions are free of income taxes as long as the funds are used for educational purposes."
Eyerman states: "All funds must be used by age 30, or there may be tax penalties."
There are other factors to take into consideration, However. There is a limit of $2,000 per year into a Coverdell ESA, and they're restricted to families with the income threshold dependent on your adjusted gross earnings. Currently, the minimum guidelines are an adjusted gross earnings of at least $95,000 for individuals and $190,000. Or less for taxpayers who are married. If you earn more than this, the limit is $110,000 for individuals filing independently or $220,000 for married couples.
Start a Roth IRA as a College Fund for Kids
What if there wasn't a Roth IRA for retirement? In general, yes, but it's not required to be, as per Laurence Namdar, a financial planner who is the director of Asher Levi Financial, a certified investment advisory firm based in Holly Hill, Florida. This area is a suburb that is part of Daytona Beach.
"A Roth IRA is an excellent vehicle for many taxpayers to invest after-tax dollars while shielding earnings and future growth from taxes forever, as long as appropriate distributions are made," Namdar states.
Consider your options carefully with every investment, such as that other relatives may contribute to the 529 but not to a Roth IRA. If you already have one, you'll want to talk about this with your financial adviser.
However, according to Namdar, one of the major selling points is: "With a Roth IRA, should a child decide not to attend college, the parents already have those funds invested for their retirement."
Put Money Into a Custodial Account
Custodial accounts are accounts for savings, which are available in two types. They are also referred to as UGMAs and UTMAs (Uniform Gifts to Minors Act and Uniform Transfers to Minors Act). They have identical assets like cash stock, mutual funds, and stocks. However, UTMAs also include physical assets such as real property.
There's no restriction on the amount you can invest in a UGMA or UTMA, which is a great option. However, it should be used with children who you feel are accountable. Your child will be legally permitted to access the funds in the account to go to college or for anything else after they reach the age of 18.
Invest in Mutual Funds
There's no restriction on the amount you can put into a fund; your investment doesn't have to be used for colleges. However, the money you earn is taxed annually. Capital gains are taxed upon the sale of shares and assets from the mutual fund, which could affect your eligibility for financial aid.
Take Out a Permanent Life Insurance Policy
This is a savings plan typically utilized by wealthy families who want to offer an income tax deduction for savings that can be used to fund multiple objectives, including education. Bryan Bentley is a financial adviser working with Talon Wealth Management, which is based in Roseville, California.
A life insurance policy that is permanent is an ordinary life insurance policy. However, part of the amount from your premium is put into death benefit, and a portion of it goes to tax-deferred savings accounts.
One benefit that this method offers, Bentley says, is the fact that money saved "can be accessed at any time for any reason, so it is not limited to college expenses. It provides additional benefits such as death and other living benefits, and there is no adverse impact if it is not used for education expenses."
The life insurance policy does not count as an asset when trying to get financial aid.
Is it ideal to take the risk of obtaining a life insurance policy? The answer depends on the family's financial circumstances, as per Bentley.
Rafael Rubio, president of Stable Retirement Planners in Southfield, Michigan, agrees that using permanent life insurance for schooling could be an excellent option.
"Life insurance gives you more flexibility than 529 savings plans," the expert declares.
However, there are some disadvantages to using life insurance to help pay for college, Rubio states. "The fees inside the policy can eat away the earnings, and it could take a long time for that cash value to surpass the premiums you pay," Rubio declares. "Thus, using life insurance to fund your child's college expenses might not make sense."
Rubio believes there are other disadvantages. "Also, some life insurance policies rely on market indexes for their performance. If the market is not performing well, returns could ruin the application of the policy just like the 529 plan," the expert declares.
Take Out a Home Equity Loan
A mortgage to finance the education of your child sounds like a risk, however it could be. But it can also pay off very well.
"This is a common approach, whether intentional or not," Bentley states. "A family's biggest asset is often their home, so it is often used to pay for college," Bentley says. If financial aid or scholarships fail to materialize, some families choose to pay down their mortgages rather than create separate college savings plans to tap the equity."
If you're looking to set up a college fund for your kids, it's an ideal choice - particularly if you have some years to save money to fund college costs shortly. It could work if you need to save more money and find an option to cover tuition fees for accommodation and food.
This is why it's important to set up a college fund for your child early to ensure you won't need numerous loans. As with all investments, particularly with college savings programs, it is always best to start saving money as soon as possible.
