When you think about car seats and cribs for your new baby, don’t forget to think about college savings options.
From learning how to change diapers to functioning on no sleep, first-time parents have a lot to think about. Indeed, finding the right stroller, learning to change a onesie, and figuring out how to introduce your dog to your baby are all high on the list of considerations. And even though it’s hard to think an hour ahead right now, as soon as you get settled into having a son or daughter in your life, it’s time to look at college savings options.
True, college seems a long way off, but the sooner you start saving, the better shape you and your child will be in when it comes time to pay for their college education. It's no secret that college is expensive. Even some of the least expensive state colleges run into the tens of thousands of dollars each year by the time you add in fees, textbooks, and lodging.
So what is a new parent to do? Along with the hope of scholarships and grants, you have several college savings options to help you, but they aren't all created equal.
5 college savings options every parent should know about
1. 529 Plans
529 plans are probably the most well-known of college savings options. Still, according to CNBC, less than 1/3 of those polled know how a 529 plan works. A 529 plan allows contributions from anyone, so family members and friends can contribute to the plan as a birthday gift, baby shower gift, or just because. You can easily transfer the plan to another beneficiary, and as long as the money goes toward qualified higher education costs, your contributions are tax-free. In addition, some states offer a tax deduction for 529 plans.
2. Roth IRA
An individual retirement account may not be the first thing that comes to mind when you think about saving for college, but they have some real benefits to pay attention to. You can withdraw money from a Roth IRA at any time without penalty as long as you use the funds for a qualified expense—like college tuition. Additionally, if you don’t use the money for college expenses, you can let the funds continue to grow toward your retirement. The downsides are that contributions to an IRA are after taxes and there are contribution limits.
3. Coverdell education accounts
A Coverdell education account falls somewhere between a Roth IRA and a 529 plan in terms of benefits and drawbacks. Contributions are post-tax and limited to $2,000 per year, although withdrawals are generally tax-free. You can also use the funds for private elementary and high school, which a 529 plan won’t allow you to do. So even though a Coverdell education account won’t cover the entire cost of a college education, it can certainly provide a big financial cushion for college expenses.
4. Savings bonds
Because the interest rate is currently low, savings bonds may not give you the highest return on your investment. They are, however, a safe way to set aside money for a college education.
5. UGMA & UTMA accounts
Both the UGMA and the UTMA are simplified trusts. The Uniform Gifts to Minors Act (UBMA) is a state-regulated way for minors to own securities. According to FinAid.org, the “Uniform Transfer to Minors Act (UTMA) is similar, but also allows minors to own other types of property, such as real estate, fine art, patents, and royalties and for the transfers to occur through inheritance.” In short, what this all means is that you can invest on behalf of your child, and when they turn 18, they receive the benefits of the trust. That does have some potential drawbacks, though. The assets in a trust are counted toward your child’s income when calculating financial aid needs. There’s also no requirement for the funds to be used for education.
How much should you save?
The cost of tuition is rising fast. According to an article in Time magazine, within the next 10-15 years, the cost of an in-state public college will be around $130,000. The article goes on to say that most families should plan to have at least one-third of that saved before their children get to college. That's a minimum of $43,000. No problem, right?
As it turns out, that's not as much as it seems like. Over 18 years, that breaks down to just $2,400 per year or about $200 per month.
One way to save for college is through a whole life insurance policy from Pekin Insurance. Get in touch with a Pekin Insurance agent today and find out how to insure your child's future.