Want to send your kids to college? Start saving now
College tuition continues to rise every year, yet many parents overlook the importance of saving for their children’s education. For new parents and those wishing to start families, the potential cost can be overwhelming.
Some online college tuition calculators show that for a child that is 5 years old today, the total cost of four years of college will be more than $175,000. According to America Saves, on average, parents pay for roughly 16 percent of their children’s education. So for that 5-year-old, parents would need to save just over $28,000 to cover 16 percent of the cost of their child’s education.
Last year tuition and fees rose about 3 percent from the year before, according to the College Board. While this figure may seem relatively small, it is higher than the growth of inflation during that time, which means the increase has a larger impact. While higher education will always be pricey, parents can make college a little more affordable for their children if they start saving right away.
There are many ways to save that help your contributions grow over time. Each one provides unique benefits:
- 529 plans: One of the most popular college-saving methods, 529 plans are state-sponsored programs that are normally managed by a financial services firm. Distributions are free from federal tax when used for education purposes.
- Coverdell Education Savings Accounts (ESA): Similar to 529 plans, ESA’s offer tax-free distributions when used for educational purposes, but ESA’s can also apply to elementary and secondary education expenses as well. ESA’s are limited to couples with adjusted gross income of less than$220,000 ($110,000 for individuals) for 2016.
- Custodial accounts: Under the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act, parents and guardians can put money in a trust, and manage that account as trustee until the child turns 21.
- Roth IRAs: Not just for retirement, the owner of a Roth IRA account is allowed to make withdrawals from the account before turning 59½ without being charged a penalty if the funds are to be used for higher education.
Whatever plan you choose to help save money for your child’s education, the most important thing to remember is that it is never too early to save. And just because your child begins college, that doesn’t mean your contributions to his or her savings plan need to stop. They can continue all the way up until graduation.