You want to give your child every opportunity to succeed in life. Higher education can open lots of doors, but it comes with a pretty big price tag. That’s why many parents choose to start saving for their children’s college education early. But what’s the best way to save?
There are a few different options when it comes to creating college funds. You could invest in state plans, create personal savings accounts, or utilize a retirement account. Perhaps the most popular method of saving for college, though, is a 529 plan. This plan is specifically designed for college savings and even offers certain tax advantages.
There’s a lot to consider when saving for your child’s college education, so let’s answer some of the most common questions we hear.
How Much Should I Be Saving for My Child’s Education?
The short answer is as much as possible.
It can be difficult to predict the total cost of sending your child to college. Tuitions might rise over their lifetime, their interests might change, or they might choose a college you weren’t expecting. To help you set a hard number as your savings goal, there are two questions you can ask yourself:
- What college is your child most likely to attend? (state college, university close to home, etc.)
- How much do you want to pay toward an education?
Establishing your own budget for how much you could reasonably afford to contribute to their education can help you to work toward a number instead of just saving what you can spare.
When Should You Start Saving for Your Kid’s College?
If you’ve started to do the math, you know college is expensive. That’s why it’s important to get started as soon as possible. A 529 plan can help. This gives you the opportunity to take advantage of compounding interest for a longer period of time and accrue significantly more than what you could save on your own.
All you need to set up a 529 plan is your child’s social security number. As soon as you apply for and receive that, consider starting a college savings account.
Can You Contribute Stock to a 529 Plan?
You must make cash contributions to your 529 plan. After you contribute to your plan, you can then invest the funds in stock options if you want to.
This is standard practice with most investment accounts. You’re required to contribute cash because it has a real value. Stocks can vary in value as prices rise and fall, which makes them difficult to use for contributions because they might not be worth the same amount day to day.
Is a 529 Plan Tax-Free?
A 529 plan has various tax advantages when used and withdrawn from properly. For example, any withdrawals for qualified educational expenses are considered tax-free withdrawals. Your CPA can help you determine what is a qualified expense and explain any additional tax benefits of your specific 529 plan.
Does My 529 Plan Have to Be From My State?
Your 529 plan does not have to be administered by the state where you live. You can explore other states’ plans to see if they offer any added benefits or better suit your needs. Some states’ investment options might be more attractive to you if your state doesn’t offer many different avenues for growing your account.
If you do choose an out-of-state plan, keep in mind that you may lose some in-state tax advantages. Your financial professionals can help you evaluate your options and choose the plan with the most benefits.
Should I Fund My Retirement Account or My Child’s Education Account First?
It’s generally better to save for your retirement before you save for your child’s education. People are unique, though, and everyone will require a different investment strategy based on their needs and goals.
If you’re not sure which route is best for you, ask your financial adviser for advice.
Can a Roth IRA Be Used to Pay for College?
You can take money from your Roth IRA to pay for college. It will still be subject to the rules of withdrawal on your account, though, so make sure you’ve met the qualifications to take money.
This option is typically useful to people who aren’t sure if their child will attend college. It allows them to invest in a way that can benefit either themselves or their child because if you don’t use the money for education, you can use it for your retirement.
If you’re eligible to contribute to a Roth, it can be a smart strategy to max out your annual contributions to it first before adding to other college savings plans.
Can We Transfer Funds to Another Child?
You might save up a healthy college fund for one of your children, but then they decide not to pursue a higher education. Now what? If you have other children, you can transfer that money to their college savings account or make them the beneficiary of the existing account. This makes it easy to reassign your savings to your next child in case they need it.
Find the Right Plan for You
There are lots of different avenues you can take to save for your child’s college education. The best path for you depends on your financial situation and your long-term goals. It’s best to consult with a financial advisor so you can get expert insight into your best options.
At West Michigan Advisors, we have experience helping families manage all types of investments. Schedule a call with us today to see how we can help you save for your child’s future.
The material has been gathered from sources believed to be reliable, however West Michigan Advisors cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide investment, tax or legal advice, and nothing contained in these materials should be taken as such. Investment Advisory services are offered through West Michigan Advisors. Advisory services are only offered where West Michigan Advisors and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.