When you bring a newborn baby home from the hospital, you might understandably think most of your financial output will revolve around diapers, formula, and cotton onesies.
While these are definitely need-them-now items, it’s never too early to start thinking about planning for something roughly 18 years down the road: your child’s college education.
Fortunately, there are several great ways to help save for college, whether your child is 12 days old or 12 years old, or anywhere in-between. To get started on this important goal, consider the following options:
1. 529 Plan
A 529 plan is a state-sponsored, tax-advantaged savings plan that helps families save for tuition and other related expenses. Moreover, the savings in a 529 plan will grow, over time, tax-free. And, when you’re ready to withdraw any funds from the account, those will be tax-free free as well — as long as they’re used for qualified education expenses, like tuition, room and board, and computers. Most 529 plans can be started with a small amount of money, and as a bonus, other relatives can also contribute to it. Over time, this can help you build up a nice college nest egg.
2. Roth IRA
You might be thinking, “Isn’t a Roth IRA for retirement?” While the answer is “Yes, usually,” you can still start one as a way to invest your after-tax dollars into a tax-free future college tuition fund. Money can be withdrawn for qualified educational purposes without penalty, but you will have to pay income taxes on it. Additionally, parents who already have a Roth IRA may enjoy the ease and convenience of allocating funds for college expenses or starting an additional Roth IRA for their children. While benevolent relatives cannot contribute to your Roth IRA, another benefit of this savings plan is that if your child winds up not attending college, you can always use the funds for your retirement. Per the IRS, there are limits to how much you can contribute; in 2022, the total contributions to your Roth IRA cannot exceed $6,000.
3. Coverdell Education Savings Account
Known as an ESA, this tax-deferred trust account is similar to a 529 plan but is more restrictive on annual contribution limits. Additionally, contributions are only allowed for kids under the age of 18. Thus, if your high school graduate takes a gap year or wants to work for a while before heading off to college, you wouldn’t be able to continue adding money to the account. One other benefit of a Coverdell account is that it can also be used to pay for certain elementary, junior high, and high school-related expenses, including tutors, uniforms, and other related costs.
4. A Custodial Account
These savings accounts can be built up with cash, mutual funds, and stocks, and, in some cases, any type of asset including real estate. You can add as much money as you want to a custodial account. However, depending on your state of residence, your child will gain legal access to the funds when he or she turns anywhere from 18 to 21 years old and can use it for any purpose.
It’s Never Too Early To Save For College
When it comes to saving for college, you can never start too early. Time has a way of flying by, and, before you know it, your babies will be ready to head off to school. By starting as soon as you can with one or more of these savings options, the financial burden of tuition and other expenses will be easier to manage.