According to recent data the average annual cost of a public university is over $25,000! This has increased by almost 7%, per year over the past decade. With college costs on the rise, what are some ways you can save for these future expenses? In this video, we will cover 3 ways in which you can prepare yourself for your child’s college education.
One of the most popular savings vehicles is a 529 college savings plan. This plan is like a retirement account, but for college expenses. Any contributions can be invested in the plan’s designated investment vehicles. Then, when it comes time to withdraw the funds, if they are used for qualified educational expenses, there are no tax implications on withdrawals. Although there is no federal income tax deduction for contributions to these plans, you may be eligible for state income tax benefits for contributions to your state’s plan.
Keep in mind, if funds withdrawn from these plans are NOT used for qualified educational expenses, you may owe a penalty on the withdrawals and income taxes on any gains from the investments.
If you are looking to earmark funds for college but want some flexibility if you child does not end up going to college, another way you can go is an UGMA Account. UGMA stands for Uniform Gift to Minors Act and allows you to gift money to your child. While your child is still a minor, the funds are kept in a “custodial” account that MUST be used for the benefit of the child. When the child reaches the age of majority (age 18 or 21 in most states), the funds become theirs to use as they wish. And not necessarily as you intend… After all, every 18-year-old needs a Ferrari, right?
One of the savings vehicles that most people neglect are your traditional brokerage accounts. Too often, people get tunnel vision in thinking they MUST save for college in a 529 plan! You can always fund college expenses with your own investment assets and savings! The bonus is that if your child ends up not going to college, the funds remain in your control to use for other goals such as retirement.
College is expensive and not getting any cheaper. The good news is you have several different ways you can save for future college expenses. The even better news is you do not have to choose just one! The key is having a flexible plan to put money away for your child’s future college expenses. Stay tuned as we follow up with the top 3 considerations for choosing a 529 plan, and don’t forget to subscribe to our YouTube channel.