How to Save for Your Child’s Education in 2024

Saving for college is a major concern for today’s families. With tuition costs on the rise, many parents are fretting over how they can provide a solid education without bankrupting the family.

Fortunately, you’ll find there are several smart options to help you save for your child’s education. The right investment plans will maximize your funds so you have a healthy fund in place to help when your child’s ready for their college adventure.

Establish a Plan and Start Young

The earlier you start saving for your child’s education, the more you’ll have when the big day finally comes. Though it’s hard to think ahead to graduation caps while your child is in the potty-training stages, it can help to get into smart savings habits early.

When your child makes it out of diapers, add the money you once spent on those diapers into your savings account each week. When he or she leaves daycare and starts elementary school, the sum you save on daycare can start pouring into this fund as well.

Put your money in a 529 savings plan. This will funnel it into mutual funds and other investments. Use an age-based approach that will place the money in riskier investments while your child is young and skew toward safer choices as he or she gets closer to college. This investment plan offers tax benefits similar to an IRA or 401K.

Lock in Rates with Prepaid Tuition Plans

Some private schools across the United States have approximately the same cost of attendance as shown above. Keep in mind that each school has its own cost of attendance.

As most parents are aware, the rate of college tuition is steadily rising. Over the last five years, tuition and fees have increased 9 percent for public four-year colleges, 11 percent for public two-year colleges, and 13 percent for private nonprofit four-year colleges.

Though you can’t halt the gradual increase of tuition, you can lock in your child’s education fees now to safeguard against higher rates in the future.

With a 529 prepaid tuition plan, you can invest in your child’s future education with a fund that will increase at the same rate as your state’s tuition. As long as the plan is used for qualifying educational expenses, your investment is exempt from federal income taxes. Some states offer their own tax deductions for these plans as well.

These plans are available from 11 states as well as a handful of private colleges. Each plan varies slightly, so you should read the fine print before investing. Most plans are backed by the state offering them. If your child chooses to attend school outside of the state or school in which you’ve invested, the funds are usually transferable, but you’ll want to confirm the exact terms when you sign up.

Invest Early with a Coverdell Education Savings Account

If your modified gross annual income is less than $110,000, you can set up and contribute to a Coverdell Education Savings Account (ESA) for your child. Your child must be under the age of 18 when the account is established, so this is something you’ll want to start building as early as possible. You can contribute up to $2,000 a year.

Withdrawals from a Coverdell ESA can be used both for college education as well as elementary and secondary school expenses. Distributions are tax-free as long as they’re used for qualifying expenses.

Have Your Child Contribute to a Custodial Account

Having children work to save for their own college expenses is an outstanding way to build their college account. However, these funds are better saved in a custodial account than in the child’s own personal fund, particularly if they have a significant sum to contribute.

Colleges expect as much as 20 percent of the student’s savings to go toward college while counting less than 6 percent of the parents’ savings. This is true even if the assets were a gift from a relative or outside source.

Keep college savings in a parents’ account and you’ll improve your chances of landing a good amount of financial aid. Keeping college funds under a parent’s thumb can offer other benefits as well. You can make sure the money funds the right accounts, such as those for room and board, while a child may choose the allocate the funds differently, skewing them more toward pizza runs and less toward the cafeteria account.

Below you will find three various ways you can save funds for your child’s college education.

Use a Roth IRA

Roth IRA is a popular option that you can use to put away money for your child’s college education. The benefit of this account is that you can use it both for college expenses and your retirement. If you’re not sure your child will attend college, you don’t have to worry about having chosen the wrong investment vehicle.

If the funds from your Roth IRA are used for qualifying education expenses, you won’t face any withdrawal penalties. You can withdraw your contributions tax-free. Earnings on those contributions are subject to taxes if you’re under the age of 59 and a half.

If you’ve been funding your Roth IRA for some time, you may find that you can take out enough for your child’s college tuition without touching those extra earnings, leaving the remainder in the fund for your future retirement.

Organize Your Finances Right

College savings are important, but so are other expenses in your life. Remember there are many options for funding your child’s education beyond your own personal savings. Financial aid, scholarships, and loans are other options available to your student. Don’t pour money into a college account at the expense of your own financial stability.

Retirement funds should take precedence over college savings. You should also pay down credit cards before channeling thousands into a college fund. The longer you hold onto a credit card balance, the more you’ll pay in interest. Pay off the credit card first, and you can funnel your monthly payments and your saved interest into your child’s future education.

Saving early is the best way to build your child’s college fund, but remember that they can supplement these savings on their own to maximize their possibilities for the future.

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