By Drew Allen
Whether you are a new parent or already have kids, the time to consider college savings plans is now. You’ll want to choose one and start setting aside funds now since annual tuition can be in the tens of thousands of dollars. Luckily, you can take advantage of compound interest by starting early, which will help supplement your investments.
Save Money Off Your Monthly Expenses to Invest
Even if you have debt, you can still invest a bit in the college fund. For example, if you have student loans, you might consider consolidating them into a new one from a private lender. A consolidation calculator is a great way to figure out what to expect payments to be when monthly obligations begin.
Some apps let you save each time you make a purchase. These apps might link with spending accounts, like checking. They will round up your purchase price. Then those funds can get transferred to your college savings account. So, if your purchase costs $37.32, the app might round it up to $38 and put the extra $0.68 in the account. And if you use cash to purchase things, you might put the spare change in a jar. Once it’s full, you can take it to your bank, depositing the money.
Consider a Roth IRA
These aren’t just for retirement. They are also great options for investing your after-tax dollars. They protect both future growth and your earnings from taxes as long as you make the right distributions. Of course, as with other investments, you’ll want to consider the advantages and disadvantages carefully. But a significant benefit is that if your child does not go to college, you can still use the funds during retirement.
Create a 529 Plan
You’ve likely heard of 529 plans before – your state government often sponsors them. They encourage parents to save on educational costs. They have tax advantages since you can often deduct the contributions from state income. When withdrawing those funds for college costs, the money might not be taxed. You can put your funds in any state’s plan, so do your research on the pros and cons of each option.
It is never too late for beginning a college savings plan, but it is best to start when you have young kids. The more time you give your account to grow, the more funds will be available for your children’s education. You often don’t need that much to begin, so you can still open an account even if you have a little. For example, some states might let you open a 529 account with $25. The most important aspect is to continue setting aside funds in the account each month or year. Otherwise, there won’t be much interest once your kids are ready for higher education.
Look for Savings Bonds
Suppose you redeem a savings bond for higher education. In that case, the income can be excluded from your gross income for tax reasons. Of course, there are some restrictions. Still, the advantages of savings bonds are that they have little risk and are guaranteed. However, they don’t earn that much interest, and you might expect it to be less than one percent.