Everyone knows that sending your kid to college can be very expensive these days, especially if your child or children wish to attend a private university and did not receive substantial scholarship money or financial aid. Parents should respond to this challenge by saving money for the education of their children early on, but this can be more complicated than it sounds. In this article, the experts at DeSantis, Kiefer, Shall, & Sarcone count down four of the best strategies to save money for college, or any aspect of your child’s education that needs funding.
Start Putting Money Away Consistently Right Now
The best thing you can do to save money for college is to start as early as possible to give your money time to grow. Put some money away today. The amount does not matter–it’s important to just get started. It may feel like a drop in the bucket at first, but it will grow over time, especially if you add to the fund consistently. The best time to start saving for your child’s education is ten years ago, and the second-best time to start is today.
Consider Opening A 529 Account
A 529 account is a tax-advantaged savings account specifically designed to save for higher education. 529 plans allow your savings to grow tax-free. Contributions to your 529 plan are even tax deductible, in some states. The big downside of 529 accounts is that you will be penalized if you withdraw the earnings from the account for anything other than qualified education expenses. You can, however, change the beneficiary of a 529 account to another member of your family. So, if one of your kids opts not to pursue higher education, you can pay for qualified education expenses for another child or family member. 529 accounts also have limited investment options.
Consider Other Savings Accounts
There are alternative tax-advantaged accounts to the 529 that you should also consider if you want to save money for college. For instance, while the Roth IRA is traditionally used as a retirement account, it can also be used to save for your child’s higher education. Utilizing a Roth IRA offers the gift of flexibility because the funds do not have to be used for education and can be withdrawn at any time. Plus, the Roth IRA has more investment options than a 529 account.
Unfortunately, Roth IRAs have restrictions of their own. For example, contributions can’t exceed earned income, or $6,500 ($7,500 if age 50 and older), per year as of 2023. You will also be penalized if the money is removed before the account holder turns 59 ½, so the account would need to be in your name, not in the name of your child.
There are also other savings accounts to consider, including Coverdell Education Savings Accounts and Custodial Accounts, which each come with their own restrictions and advantages. If you are interested in opening an account to save for your child’s education, contact DeSantis, Kiefer, Shall, & Sarcone and speak with a financial planner about your options.
Consider Other Investment Vehicles
Another investment vehicle that can be useful for saving for college is mutual funds. There is no limit on what you can invest in a mutual fund, the money can be removed at any time, and, of course, the money does not have to go toward college. However, unlike with tax-advantaged accounts, the money earned will be subject to income taxes (annually) and capital gains (when the shares are sold). Owning these assets can also reduce eligibility for financial aid.
You can also start saving money for college by buying savings bonds digitally from the Treasury Department at TreasuryDirect.gov. The advantage of putting money into savings bonds is that they are government-backed and extremely low-risk. Plus, when they are used for educational expenses (excluding room and board), funds can be excluded from annual gross income for tax purposes. On the downside, the interest you’ll earn will be very low.
DeSantis, Kiefer, Shall, & Sarcone Can Help You Save Money for College
If you embrace these fiscal strategies, it will go a long way toward helping you successfully navigate financing higher education for your children. The most important tip of all, though, is to remember to reach out to the experts at DeSantis, Kiefer, Shall, & Sarcone to figure out which of these financial tools work best for you and your family. Call us for all of your financial planning and tax service needs!