We all know that college costs are only rising with each passing year. So when you have a child, starting a college fund for your child is an important concern. For some of us, this can be an overwhelming task. To help, we have tips for starting a college fund for your child. These tips should make it easier!
Starting A College Fund For Your Child
There are a few effective options for starting a college fund for your child. Following is a short explanation of each.
Coverdell Education Savings Account
An education savings account is an investment account that is set aside for educational expenses. Distributions that you take from this account are tax-free. Be aware that there is a $2000 limit on yearly contributions, per beneficiary.
529 Savings Plan
A 529 savings plan is a state-sponsored savings plan for educational expenses. Funds for this plan are eligible for any tuition expenses from Kindergarten through 12th grade, as well as for colleges in any state. Withdrawals used for education expenses are tax-free.
There are two kinds of 529 savings plans. One type is a prepaid plan, in which you prepay for college tuition credits at today’s prices. The other is investment savings. Your deposits are invested, and your money then grows along with the value of the investment. There is no limit to annual contributions!
IRA
Surprisingly, an IRA {Individual Retirement Account} also works well for starting a college fund. One advantage of using an IRA for a college fund is that IRAs don’t count against you in financial aid calculations. This means that the money in an IRA won’t automatically reduce the amount of federal financial aid your child may receive. However, you will be subject to federal and state income taxes on your full IRA withdrawals.
Final Considerations When Starting a College Fund
For most people, the 529 savings plan is the best way to go when considering a college fund for your child. It has the best tax advantages, and the highest limits on your annual contributions.
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