The Best Accounts for College Saving

When you have a little one, the last thing you want to picture is them leaving the nest to go to college. But it’s never too early to start saving for college. The College Board estimates that one year of in-state tuition and fees at a public university costs $24,090, while a year at a private university costs $45,370. There are several strategies that can help you cover these expenses.

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The earlier you invest, the more time you have to grow your money. When you add in the tax benefits of college savings plans, you’ll save money even quicker. Even if you can’t cover everything, your kids will be better off with $20,000 in student loans than $100,000.


Getting Help From Family Members

Grandparents and other relatives can add money to the college savings plan you’ve opened. They can also open accounts on behalf of your kids, depending on whether or not they want to manage the investments themselves. Remember that with some college savings plans, your relatives will only get tax benefits if they save through their own accounts.


529 Plans

With a 529 plan, you pick different investment vehicles for your contributions. This plan offers a number of tax advantages. While contributions won’t earn you a break on your federal income taxes, many states do offer a tax break: When you spend the money on college expenses, your withdrawal is tax free. Plus, you never pay taxes on what the 529 earns through investment growth.

If your child decides not to go to college, you can use the account to pay for another family member’s college expenses. You can also keep the money for yourself, though you’ll owe income tax and a 10 percent penalty on your earnings if you spend it on something other than college.


Prepaid College Tuition

The cost of college tuition is going up fast. It might be smart to lock in a price now rather than pay more in the future. Some states, says FinAid, let you prepay semesters of college tuition at in-state schools, so that it’s all paid for later when your kids go to college.

If your child decides to go out of state or to a private university, the prepaid tuition plan will pay the average cost of in-state tuition, leaving you to cover the difference of the chosen school’s cost.


Roth IRA

If you have a Roth IRA, you can take money out before retirement without owing a penalty when you spend on qualified college expenses for family members, to a point. You can take out your original contributions without owing any taxes. You’ll owe income tax, however, if you take out your investment earnings.

Essentially, if you contributed $500 to your IRA and it has grown to $700, you won’t be taxed if you withdraw $500 for qualified expenses. However, you will owe income tax if you draw from the additional $200.

To avoid the 10 percent penalty, your withdrawals for the year cannot exceed your qualified college expenses. So if you pay $10,000 for college expenses, you cannot take out more than $10,000 from your Roth IRA, or you’ll owe the penalty.

A Roth IRA is a more flexible approach because if your kids don’t need the money, you can keep it for retirement without owing a penalty. The downside? You can only invest between $5,500 and $6,500 per year in a Roth IRA, which might not be enough to reach both your college and retirement goals.

Saving for college will take some work, but you can make it happen. Your kids will thank you.

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