Considering all the costs involved with raising children, saving for college is no easy task. After paying all the bills and putting some money towards your nest egg, it can seem like there’s no money left for college savings, let alone discretionary spending. However, for most parents, putting their children’s education on hold is not an option.
That’s why it’s so important to get smart about how you save for college. After all – you want your hard-earned money to work hard for you and your kids.
While many parents turn to 529 plans to help them save for college, that’s not the only option. Here’s a list of smart alternatives that you should also consider:
Education Savings Accounts
Education Savings Accounts, also known as Coverdell Education Savings Accounts or ESAs, offer tax-free growth and tax-free withdrawals like a 529 plan. But unlike a 529 plan, withdrawals can be used for qualified elementary and secondary education expenses as well as for college costs. However, only couples with adjusted gross incomes of less than $220,000 are eligible to open and contribute to ESAs (less than $110,000 for individuals).
Roth individual retirement accounts (IRAs) can be used as a college savings tool, especially if you and your partner are well on your way to saving for retirement. That’s because parents are allowed to make withdrawals on their contributions from Roth IRA accounts prior to age 59½ without incurring a 10 percent penalty as long as the money is used for higher education expenses.
Money accumulates tax-free – just like it would in a 529 plan. The difference is, if the child doesn’t go to college the money can stay in the Roth IRA and you can use it for other purposes, such as disability, retirement or a down payment on a house.
Custodial accounts, also known as UGMAs (for the Uniform Gifts to Minors Act) and UTMAs (for the Uniform Transfers to Minors Act), you can put money or other assets in trust for a minor and, as trustee, manage the account until the child reaches 18 or 21, depending on your state. At that age, the child owns the account and can use the money for whatever he or she wants.
This can offer families more freedom than with more traditional investment options, because you aren’t bound to use the money towards educational purposes, if, for example your child chooses not to go to college.
Dedicated college savings account
Finally, one simple alternative is to just keep a savings account that is earmarked for your children’s education. These days, savings accounts carry relatively low interest rates, but they come with other advantages, including the opportunity to teach your children about money and savings as they get older. Furthermore, a savings account in your child’s name or your name can supplement the other, more aggressive investing strategies.
Saving for college doesn’t have to be stressful or intimidating. If you have questions, we’ve got the answers. Just stop by one of our MidWestOne Bank locations.