One of the greatest gifts you can give your children is savings set aside, especially for their education. The cost of higher education continues to rise year after year, making college unaffordable for most without the assistance of their family. Being smart about your savings can make big dreams a reality. Continue reading for six great ways to save for your child’s education.
- Use a 529 Plan
529 plans are state-sponsored savings plans meant for future education costs. They are tax-friendly to incentivize people to save. You can deduct your contributions to the 529 plan from your state income tax liability. If you withdraw the money for a qualified education expense, you do not have to pay taxes on the withdrawal.
It is important to note that you do not have to use your state’s 529 plan and can choose another if it caters better to your needs. Best practice is to open a 529 plan as soon as possible to maximize your savings.
- Starting a Trust
Educational trusts can be utilized to save for higher education expenses with a designated beneficiary. Most people who start these trusts are high-income earners who take advantage of the education savings and tax planning opportunities. By putting funds into a trust, you can limit taxable estate funds.
All funds in the trust must be distributed to the beneficiary by their 21st birthday.
- Consider an ESA
An ESA is a Coverdell Education Savings Account. This type of account is a tax-deferred trust account that can be used for a multitude of education expenses. This includes elementary, secondary, and higher education costs, including room and board fees.
Both savings and earnings will grow tax-free. All withdrawals for qualified education expenses are also tax-free. Funds in this account must be used by the time the child turns 30 years old. If there are remaining funds in the account, there may be tax penalties.
- Look into Custodial Accounts
Custodial accounts are savings accounts specifically for minors. These accounts include the Uniform Gift to Minors Act and the Uniform Transfers to Minors Act. They can hold several types of assets which include cash, stocks, and mutual funds. Only UTMAs can hold physical assets like artwork or real estate.
- Save with a Roth IRA
Roth IRAs are primarily known as retirement savings accounts but can also be used as a savings vehicle. Roth IRAs allow contributors to invest their after-tax dollars into a tax-shielded account. This account will grow tax-free with untaxed withdrawals.
A positive side to using a Roth IRA is that funds do not have to be used solely for educational expenses. If your child chooses to pursue an alternative path you can use the funds elsewhere.
- Stick with a Traditional Savings Account
Traditional savings accounts can be used for college funds. While there are no rules on how much you can deposit or how you may use the funds, you do miss the benefits of other savings vehicles. Traditional savings accounts generally have interest rates lower than the current inflation rate while other savings accounts may offer higher interest rates.
You can never start saving for education too early. If you need assistance choosing the best savings fund, our Advisors at Curo Private Wealth are happy to help. Our expertise and knowledge can provide guidance to help you decide what savings account will work best for you and your family. Schedule a consultation with us today to get started.