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Why It’s Never Too Soon to Build a College Fund for your Baby

Why It’s Never Too Soon to Build a College Fund

In 2014, the average cost of a public four-year university was more than $28,000 per year, and that number keeps going up. In fact, the average is expected to climb to more than $73,000 by the 2030-31 school year.

As a parent, it’s normal to feel out of control when you see numbers like that, but you can get the money your child needs. Start saving today so you’ll have the funds to pay for your child’s college when the time comes.

College Savings Accounts

College savings plans are an excellent way to save for your child’s future. These plans are referred to as 529 plans, and they have two options.

You can go with a standard 529 savings account and add after-tax contributions to it. Then, you’ll invest the money into exchange-traded funds or mutual funds, understanding the risk and reward that goes into investing.

Your child can use the money from the plan to pay for all qualified expenses without paying any taxes on the money. Nonqualified expenditures come with a 10 percent penalty, and they are taxed.

Prepaid tuition plans are also an option. You can use your tax-deferred dollars to buy credits for the college of your child’s choice. These plans lock in the tuition price, so you won’t have to pay more, even as prices go up.

Many colleges are turning away from the prepaid tuition plans because they are almost too good to be true. Students end up paying much less on tuition, so fewer universities offer them.

It’s important to understand that 529 plans are used solely for education purposes. If your child decides against going to school or if he or she gets scholarships and grants, you can’t get to the money. You do have the option of changing the beneficiary, though.

Education Savings Accounts

Coverdell Education Savings Accounts are similar to 529 accounts, but they aren’t quite as powerful. You still add money to the account and invest it, but you can only deposit up to $2,000 a year. When the beneficiary turns 18, you cannot make any more deposits.

These plans are very flexible, though. You can use them for education expenses starting in kindergarten and going through grad school. All of the assets have to be distributed by the time the student reaches the age of 30.

High-Yield Savings Accounts

A high-yield saving account can also help you save money for college; in fact, it can help you save for retirement too! Let’s say that you deposit $10,000 into such an account, and it has an APY of 1.2 percent that compounds daily. With a monthly deposit of $100, you’ll have $11,327.93 at the end of the year. That amount will keep growing as long as you continue to deposit money into it.

This is a good option if you have a nice amount of capital to start. You’ll want to continue funneling as much money into it so you can take advantage of the high interest rates. Keep in mind, these rates can change over time, so you might be at the whim of a bank’s policy and the market interest rate. Despite this, if you can get solid growth, then you’ll be in a better position to pay for college as opposed to saving with a traditional bank account.

Roth IRAs

You can also open a Roth IRA to save for college. After-tax contributions grow untouched additional taxes, and the account comes with an almost unlimited number of investment opportunities such as stocks, mutual funds, and bonds. Instead of just using this for education expenses, you can split it up as part retirement account and part educational savings account.

If you think this is dumb because of the penalty, then consider this: you’re able to withdraw money from the Roth IRA for educational expenses without paying a penalty. However, your withdrawal will count toward income on the FAFSA, so you should think about whether this will impact your child’s ability to get financial aid.

Unlike a 529 plan, you aren’t stuck using the Roth IRA to pay for educational expenses. If your child gets a scholarship, you can hold onto the money for retirement.

However, there are annual maximum contribution limits, and certain income restrictions are in place. This can also make it difficult to reach your retirement goal while saving for college. It’s a good idea to go over your plan before moving forward.

It may seem silly to start thinking about college when your baby is just getting used to solid foods, but it doesn’t matter if your child is a newborn or a teenager. You’ll feel so much better once you set aside some money for college, the time to start saving for college is now. Talk to your friends and your family to see what plans they chose and research what is best for your baby. It's scary at first but the first step is always the hardest and we promise it gets easier!

Article written by Patty Moore, a mom blogger. See more from Patty @WorkMomLife on Twitter!

 

 

 



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