4 Strategies to Saving for Your Kid’s College Education (including what I chose)

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Education

My three boys will probably all be in college one day.

My wife and I have already made the decision that we won’t be covering all of their tuition costs, but we will make an effort to assist them as long as they are pursuing a degree.

According to a recent Fidelity study, parents plan to cover 62% of their child’s college expenses, but they’re only on track to cover 1/3 of that cost. This suggests that others have similar goals.

We began saving for our first son practically as soon as he was born because we knew that college wasn’t going to get any less expensive, and we’ve done the same with each subsequent son.

Having options, such as saving for your children’s education, is usually good, but many parents struggle to decide what is best for their children.

An abundance of options can be confusing.

The majority of parents have so many other responsibilities to attend to that choosing the finest college savings plan is pushed farther down the priority list.

Parents who are busy should not worry; this post is for you!

Here is a quick overview of the four ways to save money to pay for your children’s college tuition for anyone who is feeling overwhelmed.

1. 529 college savings plan

One of the more well-liked methods of saving for college is the 529 College Savings Plan. According to Fidelity, 33% of Americans currently use a 529 plan, up 18% from five years ago. It’s how I pay for all of my son’s college expenses in my case.

You can read a piece I published about the Illinois 529 College Savings Plan Options if you chance to live in my state. (The “S” is silent, yes.) If not, you should double-check your state to see what options are available.

Your child or grandchild, a niece or nephew, a friend, or even yourself can be saved for with a 529 plan. Some of the fundamentals of the 529 College Savings Plan are as follows:

  1. The annual contribution limit is $14,000 ($28,000 for married couples) without incurring gift taxes. By speeding five years’ worth of investments, you can invest up to $70,000 ($140,000 for married couples) at once under a special election.
  2. Up until your account worth hits $350,000, you may make contributions. (I don’t believe I will object to this.)
  3. Earnings can grow tax-free(Just like the Roth IRA).
  4. Federal taxes are not applied to withdrawals used to pay for eligible higher education costs.
  5. Withdrawals made for non-qualified costs are subject to regular federal income tax and a 10% earnings penalty.
  6. Income restrictions are absent. No matter how much money you make, you can give.
  7. You keep possession of the resources.

We adore the fact that any relative can make a contribution to the 529 plan. We’ll ask them to make a donation to their 529 plan rather than buying our sons more unnecessary goods. That is unquestionably the gift that keeps giving.

2. UGMA/UTMA Custodial Accounts

You can benefit from your child’s lower tax rate while saving for their education by using UGMA/UTMA custodial accounts. Personally, I don’t like these as much due of the control problem. I know how I was at 18, and I don’t anticipate my children to be any more financially mature than I was. If they disprove me, I’ll be glad to be incorrect.

  1. No restrictions apply to contributions.
  2. Avoid paying the kiddie tax. The first $950 of earnings is tax-free for children under the age of 19 and for full-time students under the age of 24 whose earned income is less than half of their support. Earnings under $1,000 are taxed at the child’s rate, while income over $2,000 is subject to the parent’s rate.
  3. There are no income limits. No matter how much money you make, you can give.
  4. At the age of majority, which is typically 18 or 21 years old, the beneficiary is given ownership of the assets.

I have bought my children’s stock via a custodial account. In order to provide my first son with a stock to follow when he gets older, I purchased one share each of Nike and Under Armour. With my other two boys, I intend to do the same.

3. Your Own Investment Account

You have the most control over the assets when you save for your child’s education through your own investing account. Setting up a joint (or individual) account with a brokerage company and investing in mutual funds or individual equities would be this.

Even while you undoubtedly have greater control over your finances, you’ll still have to pay taxes every year.

  1. No restrictions apply to contributions.
  2. The owner is taxed on earnings.
  3. There are no income limits. No matter how much money you make, you can give.
  4. You continue to be in charge of the assets and make the timing of withdrawals.

4. Your Roth IRA

You might be thinking, “A Roth IRA is for retirement, not college savings,” and I get that. Yes, that is accurate. I’ve come across a few instances when people put off investing for their own retirement because they are so passionate about saving for their children’s college.

By using a Roth IRA, you can be sure that you are saving for retirement and that you can withdraw your contributions tax-free if your child decides to enroll in school.

  1. Can only make an annual contribution of $5,500 ($6,500 if over 50)
  2. There are Roth IRA phaseout limits, often known as income restrictions.
  3. You determine when to take money out and have control over the assets.

Since there are no further taxes on the money once you retire, I am a BIG supporter of Roth IRAs. If you have never opened a Roth, visit my post on the Best Places to Open a Roth IRA to learn more about all of your top possibilities.

That should help you start saving for college, I hope.

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