Saving for your children’s college education can be a daunting and challenging prospect. After all – kids grow up fast, and college is expensive.
Your children’s college tuition could be one of the largest expenditures you ever make. And, if you have more than one child, the commitment is even greater.
Fortunately, families who want to save for future college expenses now have more options than ever before. You can choose from traditional investment options such as savings accounts, taxable investment accounts, annuities and bonds and powerful new tools, such as Section 529 college savings programs and education savings accounts.
One of the first steps to successful college savings is to create a plan. Here are a few tips to get you started:
1. Don’t wait too long to get started.
Given a choice, it is better to start saving for college when your child is five instead of 18. Try and think about it this way: Every dollar you save could mean one less dollar you have to borrow. This will save you additional money in interest payments.
2. Take a good look at your budget.
If you don’t have a budget yet, now’s the time to start. A budget will show you how much you are currently spending and how much you can carve out for savings based on that.
3. Establish a system for saving that is automatic.
Instead of waiting for a time when you have “a little more money,” an automatic system will help you stay consistent and amass more savings. Talk to your financial professional about how to have money automatically deducted and deposited into a college savings account.
4. Set up a 529 state-sponsored savings plan, Coverdell ESA or other similar savings account.
These types of plans offer attractive potential for federal tax-deferred earnings growth and federal tax-free qualified withdrawals. With a 529 plan, for example, you can contribute up to $13,000 (or $26,000 if you and your spouse give and file jointly) each year without owing federal gift taxes, provided you haven’t made other financial gifts to the plan beneficiary in the same year. In addition, you can elect to make a lump-sum contribution of up to $65,000 ($130,000 for married couples filing jointly) in the first year of a five-year period, provided you don’t give the beneficiary additional taxable gifts during the five-year period. These types of plans also make it very easy for grandparents or other supportive family members to contribute to savings.*
5. Save the “extras.”
When you or your partner receive an unexpected bonus, commission or tax refund, make it a habit to put it toward your children’s college education.
6. Encourage your child to take Advanced Placement (AP) tests while they are in high school.
When your student takes and scores high enough on an AP test they can get college credit for free. Meet with your high school advisors to learn more about this option.
You’ll be most successful saving money for your children’s college education if you take a proactive approach. Nonetheless, this doesn’t mean it will happen magically. Saving for your child’s education means making sacrifices. Whether it’s putting off a purchase or living more frugally, you and your family will need to make*Prior to investing investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate to you, consult your financial advisor prior to investing. Securities and Insurance products offered through LPL Financial and its affiliates member FINRA/SIPC. MidWestOne Bank is not a registered broker/dealer and is not affiliated with LPL Financial.
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