Saving for college can seem like a task that might never be accomplished. Many people don’t know where to start and time flies when you only have about eighteen years to save before the money will be needed. In addition, lots of people don’t know all the options available to them when paying for college. In this blog post I will talk about many different ideas that can be used to save for college depending on your goals and strategy for saving for college.
529 Savings Plan – These plans allow returns to grow tax free. Distributions are also not taxed as long as they’re for qualified college expenses such as tuition, fees, room, board and books. Some states give you tax deductions and other tax breaks for contributions to a 529 plan. If you withdraw the money for non college qualified expenses, you’ll owe both income tax and a ten percent penalty on the amount you take out.
Prepaid Tuition Plan – If you have the option, you can contribute to your state schools prepaid tuition plan ahead of time and guarantee future tuition is paid for. This is a great way to protect against future tuition hikes and lock in a college education at today’s rates. The problem with this is if your child doesn’t want to attend the school where you set up this plan, the money is lost or must be used by another family member in the future.
Municipal Bonds – Municipal bonds are a tax advantaged way to save for college. If you invest in “munies” in your state, they’re completely tax free. Federal taxes are not incurred on any municipal bonds that you buy. In almost all cases you can get some better returns than many other safe investing options. As the yields compound, you can really get some great long term tax free returns if structured right.
Life Insurance Policy – There are certain types of life insurance accounts that you can open which are invested and grow tax free forever. As your account increases, you’re also able to take loans out against yourself. The best part is that the interest you pay back on the loan goes back into your account and then compounds again. If structured correctly, this is a great way to finance your own student loans and have additional money after college for other investments.
Roth IRA Accounts – Parents can contribute to a Roth IRA account and use the money for higher education without getting the ten percent penalty when removing the money before age 59 ½. If using this option, the money can be used for retirement or other uses if the child decides not to attend college.
Savings and CD’s – Savings and CD’s are safe alternatives to save for college but typically pay less rates of return than other options. They also don’t enjoy many of the tax advantages that the other options do. The child may also have access to the account.
With many of these strategies you can have your children contribute to these accounts by paying them for chores around the house and investing those funds or having them contribute job earnings to these accounts when they’re older and in the work force.
Disclaimer: Please seek professional advice regarding tax liability and investing options based on your personal situation.