If you have young children, planning for college is one of the most important things you can do for their future. There are many families that value higher education, but a great deal are unfortunately caught unprepared when the time comes for their kids to go to college because they simply never started saving or waited too long. Don’t let your family fall into this trap!
There are different types of plans when it comes to college savings, and it’s important to know the differences in order to choose the plan that is best for you and your child.
Here are some college savings options that can help you get on the right path for college planning. If you already started a plan, these examples will serve as a great refresher of how your plan works.
- 529 plan
With a 529 plan, you can save money for college, plus distributions are tax-free if used for qualified higher education expenses. But you must be careful with a 529: These accounts carry fees, expenses, and tax ramifications if not used properly. See your financial professional to get information and read the prospectuses carefully regarding risks, charges, and expenses associated with the portfolio before investing your money.
- Coverdell Education Savings Account
These accounts can also be used for K-12 education as well as college. Money grows tax-deferred and may be withdrawn federal tax-free for any qualified higher education expenses incurred by your children before age 30. After that, you will incur a 10% tax penalty and earnings will be taxed as ordinary income. You must still pay state taxes. A financial professional can help you set up this account, but remember that this plan (like most others) is exposed to the market.
- UGMA and UTMA (Uniform Transfers to Minors and Uniform Gift to Minors)
These multi-purpose savings accounts are frequently used for college. When you put money in these accounts, you are making a gift to your children; when they turn 18 or 21, they can withdraw the money for college. This money can be used for anything, but it could lessen your child’s chances to qualify for financial aid, as it is considered income.
- Mutual Funds
If you put your money in the hands of a professional money manager who invests in mutual funds, thereby exposing your money to the volatility of the market (like in 2008), how can you be sure your savings will be enough for college? This really isn’t the best option for something like a college savings plan. I advise you to talk to your financial planner about the above plans instead.
Planning for a college education seems complicated, but it’s not as hard as you think. Getting good advice and starting when your kids are young will set your kids up for a bright future! I owe my educational success to my parents for doing just that—how else would I have become the world’s smartest dog?