Many young people today postpone starting their families. The average age for first-time parents increased by 1.3 years since 2007. But postponing starting your family means wasting valuable time for interest to accrue on your child’s college savings.
This doesn’t mean you should have a child before you’re ready — but if you’re planning on starting a family someday, start saving well before you pick a paint colour for the nursery. As soon as you get your first career position where you earn sufficient income to save some of it, open a savings account for their future college costs. You can always redirect the money toward your retirement if you end up opting out of parenting later.
529 savings plans offer significant tax benefits. The name stems from Internal Revenue Code Section 529, which creates a tax-free status for qualified tuition programs. You fund the account on a tax-deferred basis, and as long as your child uses it for qualified tuition expenses upon withdrawal, you owe no tax.
Nearly every state offers 529 plans, but they do not limit your child to remaining in-state. 529 funds apply to any qualified university across the nation. One nice feature of 529 plans is you may use the money for room and board as well as tuition and books.
If you have a Roth IRA at work, you can contribute there, or you can open one on your own at a bank or credit union. IRAs offer one valuable avenue for making your money work for you.
For example, if you set aside 10 percent of your salary in a retirement account for 15 years, you amass 113 percent more than you would in a traditional savings account. And with a Roth, you put money in on a post-tax basis. Because you’ve already paid taxes on the money, you won’t get hit with a hefty bill when you withdraw funds to pay for tuition.
The cost of higher education continues to soar. When you prepay your college tuition through a special type of 529 savings plan, you can lock in today’s rates, which can result in considerable savings. And you don’t lose your money if your child attends a different school. For example, if you live in Florida but your child wants to attend Harvard, you can change the beneficiary or request a refund. Unlike regular 529 plans, prepaid plans only apply to tuition and fees, not room and board.
A Coverdell Educational Savings Account (ESA) operates similarly to a 529 — however, you fund this account with post-tax dollars. This means you pay no additional taxes if you withdraw from the account.
You can contribute up to $2,000 per year depending upon your income. Distributions (including interest earnings) are tax-deferred but must be withdrawn or transferred to another beneficiary when the original reaches age 30. One nice feature of the Coverdell ESA is you may use funds for K-12 education, helpful if your child attends private school.
Some credit cards offer rewards in terms of college savings. For example, the Fidelity Investment Rewards American Express credit card channels cash rewards directly to a 529 savings plan. To get the most out of such cards, use them regularly for everyday purchases — but pay them off immediately to avoid interest charges. This way, you get all the rewards for fewer fees.
Do you shop online? Why not get cashback in the form of college savings by registering with Upromise? You can join for free. The organization hosts college planning tools on their site and you also earn cash when you dine out.
When relatives ask you for gift ideas for birthdays and holidays, suggest they contribute to your child’s 529 savings plan. This helps you accumulate significant savings even if your budget contains minimal wiggle room.
Finally, as your child matures, research grants and scholarships as soon as they hit grade 7 or 8. Many scholarships have vigorous qualifying criteria, and your child needs a roadmap of what they must do to earn the reward. Exercise caution when letting teenage children take on part-time work — yes, you want to encourage them to learn responsibility, but not if work causes their grades to suffer.
By starting early and using the investment vehicles listed above, you can grow your money and fund your child’s higher education costs. Doing so gives them a sound start in life free from suffocating student debt.
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