College Savings Accounts
College is expensive, even with loans. So, why not start the saving process early? There are a few different ways that you can start saving early on that aren’t just a separate bank account. Here are three ways to start saving for college.
Almost every state has its own 529 plan, also known as a Qualified Tuition Program, each coming with their own annual fees and operating costs. The great thing about a 529 plan is that you can put your money into any state’s plan. Spend some time looking around choose the state plan that you like best. The 529 plan also has tax advantages, the main one being that earning aren’t subject to federal taxes. You can usually begin with contributing small increments of cash. However, some state plans only allow for one adjustment to the account per year. When using this plan, you typically invest after-tax money. You can withdraw the money for qualified education expenses, such as tuition or textbooks. If your child ends up not going to college, you will face possible fees and tax penalties when withdrawing the funds.
You can also consider using a 529 college prepaid plan. For this plan, you can choose a college in your state and buy tuition credits and the current tuition rate. That way, you will not have to wait until your child is preparing to go to college and pay the going rate then. However, if your child does not want to go to the school you’ve chosen, you can get your money back, but it may not have grown as much as it would have in a different account.
UTMA and UGMA account
UTMA and UGAM accounts are custodial accounts that act as a trust for your child. Assets like annuities, stocks, bonds, or cash can be put on reserve into one of these accounts. However, your child’s college of choice will take the amount of money in these accounts when considering financial aid. If you have a lot of money in one of these accounts, the school may not offer you a lot of financial aid. However, if you have a lot of money in the account, you may not need financial aid.
Before opening a UTMA or UGMA account, discuss it with a financial advisor. These accounts are considered your child’s asset, not yours. This means the money belongs to your child. Once your child turns 18, they can use the money for college or for something else.
Coverdell Education Savings Account
Coverdell Education Savings Accounts are used specifically for your child’s education. However, the main downside of this type of account is that you can’t put more than $2,000 a year into one or multiple education savings accounts. The money in the account is typically tax-advantaged if the money is used to pay for educational expenses. If the funds are not used by the time your child turns 30, they may be subject to taxes.
A Coverdell education savings account is considered your asset, not your child’s. This means that it will have less of an impact on their chance at getting financial aid. In addition, the money in these accounts can be used to cover any educational expenses, including private school tuition for grades K-12.