Saving for child’s education is a noble feat and a great option for your money if you have all of your other ducks in a row.
If you’re ready to save for your child’s college education you have several choices for doing so. Different options will suit different people. (If you’re unsure of how to start saving consider talking to a fee-only financial advisor.)
Here are four ways to save for your child’s college education.
A 529 Plan
A 529 plan is a college savings account you can get through your state (or another state) that comes with some tax advantages. With a 529 plan the earnings are not subject to federal tax if used for qualified education expenses. Also, many states give additional tax credits, up to a certain dollar amount for 529 contributions.
The downside to saving with a 529 is that the money saved does have to meet the specific plan’s qualified expenses or else you’ll pay taxes and penalties on the money. Also, saving in a 529 plan could affect your child’s chances at getting financial aid and you may have limited investment options.
Pros: Money Grows Tax Free, Possible Tax Credits
Cons: Money Must be Used for Education Expenses, Can Affect Financial Aid
A Prepaid Tuition Plan
A 529 Prepaid Tuition Plan is very different than a regular 529 Savings Plan.
With the prepaid tuition you’re paying for the cost of college now to cover the cost later. Essentially you’re locking in today’s rates even though your child may not go to school for 10 or more years.
While there can be (potentially) great savings to be had there are some downsides to the prepaid tuition plans as well. With a prepaid tuition plan the student may be required to maintain a minimum GPA, be a resident of the state they’re going to college in and funds can only be used for college expenses.
Pros: Guaranteed to Keep up with Inflation, Tax free Withdrawals
Cons: Required Grade Point Averages, Doesn’t Cover Room and Board
A Savings Account
Next we move to a regular savings account. Anyone can start saving for their child’s education by simply opening up a savings account dedicated to the goal.
When you save through a regular savings account you won’t gain any tax benefits or keep up with inflation. (At least not with today’s interest rates.) However, you are free to use the money however you like and won’t be faced with penalties and fees if your child does not end up needing the money for education expenses.
Pros: Money Doesn’t Have to Be Used Exclusively for Education
Cons: No Tax Benefits, Likely Won’t Keep Up with Inflation
A Personal Investing Account
Another option for college savings, and what I personally do, is use a personal investing account. I use Betterment and have two different investment goal accounts opened for each of my daughters.
With a personal investing account you can choose your investments and use the money for what you like. Just like a savings account you aren’t presented with fees if your child doesn’t choose to go to college.
Pros: Many Investment Options, Money Doesn’t Have to Be Used Exclusively for Education
Cons: No Tax Benefits
Making the Choice
Different options work well for different situations. If you aren’t sure which route to take I encourage to open up a savings account and start stashing away money.
You can then use that money to open up a 529, prepaid tuition plan or investment account in the future if you choose to do so. And remember, even small amounts add up. Saving $50 per month now could greatly benefit your child once she enters college.
What’s your favorite method for college savings?