Saving for your children’s college tuition is no easy feat, particularly when college costs are at an all-time high. Ideally, parents should start saving for their children’s college tuition as soon as possible, but of course, this is easier said than done. You don’t want to neglect your own needs in the process, especially when it comes to retirement savings. Knowing how to save can help you in the long run. With that in mind, here are five tips for saving for your child’s college tuition:
529 Plan
A 529 plan is a savings account set up explicitly for educational expenses, and works similar to a Roth IRA. There are two types of 529 plans; a prepaid plan, which allows you to put funds towards designated schools, or savings plans. If the original beneficiary does not plan to use the funds for tuition expenses, it can be transferred to another family member, including yourself. Plans are set up on a state level and can deliver state income tax advantages. Earnings grow tax free and you can benefit from a set it and forget it savings model.
Leverage Your Home Equity
Although a loan isn’t the most ideal option, sometimes it’s the quickest solution for parents who have children entering college soon. If you’re strapped for cash but have equity in your home, you can leverage your home equity and borrow money to help support your children’s education. Equity loans can be great options for homeowners who need to make high-value purchases. There are several ways to achieve this.
Home equity loans allow you to use the equity in your home to borrow a lump sum of cash. A home equity loan can give you $35,000 or more, depending on how much equity you have on your home. Senior homeowners can take advantage of a reverse mortgage loan. As the name implies, with a reverse mortgage, you are paid a monthly sum, rather than paying a mortgage. This can help you pay down some of your debt as you help your students with various college expenses. Reverse mortgage counseling is required for eligible senior parents interested in this option.
Coverdell Education Savings Account
A Coverdell Education Savings Account is a trust or custodial account set up solely to pay for qualified educational expenses. It can be applied towards elementary, secondary, and higher education purposes. A Coverdell account is similar to a 529 plan in that it offers tax-free investment growth and withdrawals, however, it has more flexibility in terms of what constitutes as educational expenses. For example, you could make a smaller withdraw of $500 for school textbooks.
ROTH IRA
Although typically used for retirement, a Roth IRA can also be geared towards education. You’re eligible to contribute towards a Roth IRA at any age, as long as you have taxable, earned income and don’t make more than a certain amount of money. There are no minimum required distributions, which means you can keep your money in the account if you don’t need it.
Your contributions earnings will continue to grow tax-free, can be withdrawn at any time without a penalty, and you can retrieve all funds to help children and grandchildren with expenses at the age of 59. Afterwards, any remaining money can stay in the account and go towards your retirement fund. One thing to keep in mind is that Roth withdraws do count as income, and may affect financial aid eligibility.
Save Towards Custodial Accounts
There are two primary custodial accounts, called UGMAs and UTMAs (Uniform Gift to Minors Act and Uniform Transfers to Minors Act). Custodial accounts are the most common type of savings accounts opened up for minors. Custodial accounts can house cahs, mutual funds, stocks, and other assets.
Both of these custodial accounts do not have any limits on how much money you can put into these accounts, but you should only use these if you believe your child will use the funds responsibly because they can access these funds for any reason after the age of 18. Prior to legal age, all assets can be accessed and managed by the adult custodian and account holder. Over time, the account will grow due to reinvested dividends or investment returns.
Consider a Permanent Life Insurance Policy
A permanent life insurance policy is a type of policy that’s typically used in higher-income families because it creates tax-advantaged savings opportunities and allows you to save for multiple goals at once. It has the same benefits as a conventional life insurance policy, however, some of your savings will go towards the traditional death benefit while others will be siphoned into a tax-deferred savings account. The Money you save can be accessed at any time, so you aren’t limited to college savings only.
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