These Are The Best Ways To Save For College
Do you want your children to go to college? If so, you’re going to need somewhere between $200k and half a million dollars by the time they’re ready for higher education. Children born in the last few years will be facing a truly staggering price tag for college.
As parents, this means you’ll need to start saving for your children’s college expenses as soon as possible. While there are several options for higher education savings, a few stand out above the rest. Keep in mind that the right option for you might be different than for others, and a lot will depend on your own financial situation and flexibility.
Option 1: The 529 Plan
There are two varieties of the 529 plan, and both varieties essentially allow you to pay for you child’s future college attendance at today’s rates.
529 Prepaid Tuition Plan
This is a straightforward plan that allows you to purchase college credits today that can be used in the future at a state school. In other words, it allows you to lock in tuition costs at today’s rates. Generally speaking, your child will need to be a resident in the state of the school they want to attend to participate in that state’s prepaid tuition plan.
529 College Savings Plan
Usually the more popular option, this version of the 529 plan allows you to make contributions to the plan over time. You can choose from a variety of investment options that have the potential to grow and compound for many years before you begin making withdrawals.
The major incentive here is that, assuming you use the funds for qualified educational expenses, your funds enjoy tax-free growth as well as tax-free withdrawals. Lifetime contribution limits range between $235,000 to $520,000, depending on the plan you choose.
Each state offers its own 529 plan, and you can participate in any state’s plan, even if you are not a resident of that state.
Option 2: The Coverdell Education Savings Account
The Coverdell Education Savings Account (ESA) is another option for college savings. Thes accounts can be opened through your brokerage firm, bank, or credit union.
When you make contributions, you can choose from a variety of investments (similar to the 529 College Savings Plan) to help grow your savings account.
The biggest difference between the Coverdell and 529 plans is that Coverdell ESA accounts are capped at a relatively low $2,000 per year maximum contribution per beneficiary. Additionally, your ability to use it is limited by your income and your beneficiary must use the Coverdell ESA’s assets by age 30.
How To Get Started
Before you start saving for your child’s college expenses, consider speaking with a financial planner first. In addition to helping you create either a 529 or Coverdell ESA account, your financial planner can help you create a budget to maximize your contributions without risking other important financial obligations like your retirement or monthly living expenses.
For more information, please contact us today for a free consultation.
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