Getting a college education is still an important factor for success in today’s world. A problem with this is that college is becoming more expensive. Unless a child receives a scholarship or financial help, he or she may not be able to finish and get a degree. However, parents, grandparents, and others have several options to help them save for college, which include the following methods.
The 529 Plan
States sponsor the 529 plan program. You can put money into the account (after taxes), but the money grows tax-free. When your child uses the money to pay for qualified education expenses, you do not need to pay any taxes. Most states allow you to put up to $300,000 into the account. This plan also allows you to prepay tuition. One possible drawback is that since the state sponsors them, you may only use the money for colleges within that state. Some states may permit you to take the value of your contributions off of your state income tax.
Education Savings Account (ESA)
This plan to save for college also grows tax-free, but it only allows you to put $2,000 into it per year. Most likely, it will earn a higher rate of interest than a regular savings account. You do not need to pay taxes when you withdraw the money for education expenses. Also, you may use it for education grades K-12. The money must be used by the time the recipient reaches 30. There are income limits on this plan.
UTMA or UGMA Custodial Accounts
These accounts, the Uniform Transfer to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA), are controlled by a custodian and act similar to a trust. However, they do not require an attorney to establish the account. Although you may use the money to save for college, you can also use it for other purposes. There are some tax benefits, but they are not guaranteed. You can also put as much money as you want into the account. All of the money is transferred to the control of the beneficiary once they turn 18 or 21, which means that it may not go where it was intended.
A Roth IRA
The advantage of mixing your child’s education funds in your own IRA is that it enables you to remain in control over the money. This way, if your child never goes to college, you retain control of the money and it will not go to waste. If you are younger than 50, you can make contributions up to $6,000 annually. If you are 50 or older, you can contribute up to $7,000 each year. One possible problem is that you cannot withdraw the money before you turn 59 1/2 without a 10% tax penalty.
Buy Eligible Savings Bonds
If you buy savings bonds when the child is young, by the time your child reaches college-age, the bonds will have matured and likely earned extra interest. A strong advantage of using savings bonds is that they are very low risk and are guaranteed by Uncle Sam. A problem is that they earn low rates of interest. When paying for tuition (not room and board), you do not need to report the money on your tax forms.
Get a Home Equity Loan
If you have considerable equity in your home and do not have other options, you can take out some of it to pay for your child’s education. The amount you get will depend on the equity you have (calculated by an appraiser), the size of the loan you want to get, and your income.