Raising your kids is a tough job. Just keeping track of school stuff, sports practices, and recitals is enough. Looking down the road to distant things like college can be pretty overwhelming. You’re doing your best to make smart decisions for their futures, but you’ve got so many balls in the air right now, it’s a challenge to even know where to start when it comes to saving for their future. Congratulations on being a normal parent!
No matter what your current situation or financial capabilities, if you don’t read anything else in this article, take this fundamental idea with you: the best thing you can do is to start saving right now, and try to be as consistent with your savings plan as you can.
If you want to know more, we’ve got some ideas for getting your kid into those collegiate corridors that should help alleviate some of your current anxiety and keep you from sacrificing your own financial security down the road.
Read on for a few ways to get started saving and growing your kid’s college fund.
Saving For Your Kids' College
I want to start a college fund. Where do I start?
Open a savings account and deposit money into that account at the same time every month. Be consistent.
Plan how and when you will add additional funds so that savings opportunities don’t get away from you.
What should I keep in mind as I plan for my child’s education?
Money grows when it has time to sit. More money deposited means more growth. Every deposit amount counts.
Do the best you can but don’t sacrifice your immediate financial well-being.
Are there ways I can save on my taxes while saving for my child’s education?
A 529 account is a tax-advantaged account designed specifically for education savings. Not only could your contributions be tax deductible in some states, but interest income and qualified withdrawals are also tax free.
Your IRA isn't just for retirement! IRAs also allow for penalty free withdrawals for qualified educational expenses.
Get a Head Start
Start as early as possible.
We all know the cost of college is pretty intense and ever-climbing, but by starting early, you give your money time to grow. Fifty bucks a month for 18 years is about $11,000 if you count an initial deposit. Considering even moderate growth of 5%, your $11,000 of contributions can grow into almost $17,000 in that time. That’s $6,000 toward your kid’s education just for being patient. You just need to be consistent.
Planning is key.
Over the years, there will be tax refunds, bonuses, or raises that let you contribute more. Childcare costs decrease as your child gets older, steadily reducing your immediate fixed costs. It’s important to have a plan in place for increased disposable income. “Extra money” has a funny way of spending itself when not properly allocated. You might opt to distribute a percentage of any windfall or tax refund towards college savings. Funds you once had earmarked for child care can be redirected to an education fund.
Involve your child.
This is a group effort. Talk to your kid about what you’re doing to help them pay for their education. Let them know that they can help, too. Whether it’s contributing part of their allowance when they’re young, or working toward scholarships when they’re older, demonstrating that their future requires investment now will help them take ownership over their education, and will definitely reduce how much they may have to borrow.
Best College Savings Plans
Open a Tax-Advantaged Account
When you’re thinking about where to stash cash for your child’s future education, explore these tax-advantaged options. A tax-advantaged account is a goal-specific savings or investment account that has benefits like tax-free growth.
529 Account
A 529 account is crafted specifically for educational expenses. This plan allows your savings to grow without being taxed, and in some states, your contributions may be tax deductible.
Withdrawals from a 529 must be for qualified education expenses. The great news is that these withdrawals are also tax-free, though there’s a penalty for using the funds for other expenses. The flexibility of a 529 allows you to switch the beneficiary to another family member, giving you options if college isn’t right for one of your children.
Traditional and Roth IRAs
Generally thought of strictly as a retirement savings tool, your IRAs are pretty flexible. They can also be used to save for your child’s education alongside your future security. If money from your IRA is used for qualified education expenses, withdrawals will avoid the 10% early-withdrawal penalty. Furthermore, you can withdraw your contributions to your Roth IRA tax-free at any point.
Once your child has their own earned income, you may want to consider opening up a Roth IRA for them. If they end up not needing this account for college, it’ll still be there, growing tax free until they’re ready to retire.
There are some contribution limitations related to income and age that may restrict how much you can save specifically for education. It’s also important to note that while withdrawals on contributions are tax-free, withdrawals on earnings are taxed as income.
Coverdell Education Savings Account
The Coverdell Education Savings Account (ESA) also offers tax-free interest earnings and distributions for educational expenses, but can be used for K-12 expenses. This account has eligibility restrictions and lower maximum contributions, limiting its ability to cover all education expenses, however, the value of the account is considered a parent asset on the Free Application for Federal Student Aid (FAFSA).
Other Ways to Save For Kids College
High Yield Savings Account
A high yield savings account is exactly what it sounds like: a savings account with a higher interest rate than you might see at your current bank, usually 3% to 5%. These accounts are helpful if you might need access to the funds for purposes other than college savings. They’re easy to open and you’re free to use your money as you like. On the flip side, there are no tax advantages, and while your money will grow, it won’t grow at the rate of a long-term investment. Additionally, those interest rates could adjust downward at any time, so be aware that “high yield” is a relative term.
Savings Bonds
Qualified US savings bonds are low risk and guaranteed by the government. When used for education expenses, redeemed bonds are excluded from your annual gross income (AGI). That said, a savings bond won’t make you much money and only offers tax advantages when used for higher education expenses, excluding room and board. Savings bonds are available for purchase online through TreasuryDirect.gov.
Non-Retirement Investments
This account may be referred to as a taxable account, non-retirement, non-qualified, or just a plain old brokerage account. While there’s a bunch of names for it, this is just an investment account that you would open that’s not a tax-advantaged investment account like an IRA, 401(k), or a 529 plan. You will have more investment choices than a 529 plan, and have more growth potential than a savings account or savings bonds.
While you won’t receive the tax benefits of other types of investment accounts, you also don’t have the same restrictions. You can put as much in the account as you want, take out as much as you want, and invest however you like.
These are great options if your focus is maintaining flexibility as they can be used for a any expenses, from covering rent to purchasing a car for your student. Of course, with all that flexibility there are some downsides. Earnings from accounts like these are subject to income or capital gains taxes and can affect eligibility for financial aid.
Final Thoughts
You definitely want to prioritize your child’s education, but don’t do so at the expense of your own financial future. If you have to, you can take out loans for education, but you cannot do the same for retirement expenses. Put on your own oxygen mask first!
Saving for college is also a great way to get your child involved in their own future. If it’s the right fit for your family, have them work part-time or during summer breaks to contribute to their savings. Explore options like AP courses or college dual enrollment so your child can earn college credit while still in high school. Encourage them to explore opportunities for scholarships and grants, no matter how big or small. Free money for education of any amount is welcome, and the recognition of earning a scholarship or grant will boost your kid’s confidence as they embark on this new journey in their lives.
Student loans are recommended as a last resort. While they can bridge financial gaps, the long-term financial implications are intense and should be weighed thoughtfully and with a long view.
As always, we recommended tackling college savings strategically. Consider all available options, and take a multi-pronged approach. Seek professional guidance for solutions to maximize savings, keep your retirement assets protected, and set your kid up for success during their education and after graduation.
For the last quarter-century, the professionals at SK Wealth have perfected The Integrated Financial Advantage™, a unique financial planning approach crafted to provide our clients with personalized guidance for all stages of life so they can live with intention both tomorrow and today.
