Whether your child is 18 months old or 18 years old – saving money for their college education is a critical piece of your financial picture. As tuition prices continue to skyrocket, it’s more important than ever to have a strategy for handling the cost of higher education. Obviously, the sooner you start saving the better. The good news is there are several options that make the process relatively painless, allowing you to save while taking advantage of some tax perks too. Here is a bird’s-eye view of a few options:
COLLEGE SAVINGS PLANS
529 plans are a very popular college savings vehicle. Offered and administered by each state, they allow funds to accrue tax-free and withdrawals for qualified education expenses can be withdrawn without penalty. In a 529 plan, your after-tax contributions are invested in mutual funds or similar investments. Rules, fees, and tax advantages differ from state to state. Note that you do not need to invest in the plan for your home state – so shop around and find the state 529 plan that best suits you.
Prepaid College Tuition Programs
Like a 529 plan, these tuition programs are administered and managed by each participating state, so benefits and rules will vary. But, in many cases, prepaid tuition programs allow you to lock in current tuition rates, as you invest money into the savings plan. Again, there are risks, rewards, and differences in these plans across the country.
Traditional or Roth IRA
While an IRA is traditionally a retirement savings account, and funds withdrawn before the age of 59.5 are subject to penalties, there is an exception for funds withdrawn for qualified higher education expenses. Similar to a 529, money is invested in the IRA using after-tax funds. However, be aware of income and contribution limits.
GIFTS AND CASH BACK PROGRAMS
Here is a way of saving while you are spending. Sponsored by Sallie Mae, Upromise allows you to earn cash back rewards on eligible purchases at over 850 major retailers. You can link your cash back rewards directly to a college savings plan or set up a goal saver account to hold your earnings. This is an easy way to add to your college savings accounts. Go to www.Upromise.com for more information.
Gift of College
Allowing family and friends to provide a gift in the form of funds directly into your college savings plan, Gift of College is an easy-to-use website providing another valuable way to plan and save for college. You can create an account on the website (www.giftofcollege.com), link it to your college savings plan, and then tell your family and friends. They can purchase gift cards directly from the website, or at retailers, such as Toys R Us. Funds from the gift cards can then be transferred directly into your college savings account.
These are just a few of the options available to help you save for the monumental cost of higher education. Contact us for more detailed information or to map out your college savings strategy.