One of the most expensive aspects of raising a family is paying for your child's education. With college tuitions on the rise, and the pressure to graduate from college growing, it’s more important now than ever to start saving for your child’s education. To help get you started, True Homes has put together a list of helpful guideposts to keep in mind when planning for your child’s education.
Save Early, and Save Often
Consider Special Tax-Deferred Education Accounts
There are a couple of special, tax-deferred education accounts that can help you get the most out of your education savings. Two popular education savings accounts are: 529 College Plans, and Roth IRAs.
529 Plans are state-sponsored investment vehicles; similar to your employer-sponsored 401-K. 529 Plans are set up by the parent, who always retains control of the account. The main benefit of 529 Plans is that the account owner (parent) doesn’t pay income taxes on the account’s earnings, meaning your investments can grow tax-deferred much like an IRA. Contributions made to the 529 Plan are after-tax dollars, and qualified withdrawals for education expenses are tax-free. Additionally, there are no income restrictions, so anyone can open (and contribute to) a 529 Plan. And if your child decides not to go to college, you can always transfer the account to another beneficiary. FinAid.org has a comprehensive page detailing the pros and cons associated with 529 Plans.
Roth IRAs are another popular type of account to start saving for your child’s education; however, they are much more limited in terms of who can contribute to them and how much. Roth IRAs must be opened in your child’s name, and there may be minimum opening deposits and/or annual contributions. Roth IRAs also have income cutoffs, and must be opened at least five years before you plan to start withdrawing money for education expenses. Furthermore, any profits withdrawn from Roth IRAs are taxable. The upsides to Roth IRAs is that any unused money can be used to jumpstart your child’s retirement savings, and they are much more flexible in terms of investment options.
529 Plans are state-sponsored investment vehicles; similar to your employer-sponsored 401-K. 529 Plans are set up by the parent, who always retains control of the account. The main benefit of 529 Plans is that the account owner (parent) doesn’t pay income taxes on the account’s earnings, meaning your investments can grow tax-deferred much like an IRA. Contributions made to the 529 Plan are after-tax dollars, and qualified withdrawals for education expenses are tax-free. Additionally, there are no income restrictions, so anyone can open (and contribute to) a 529 Plan. And if your child decides not to go to college, you can always transfer the account to another beneficiary. FinAid.org has a comprehensive page detailing the pros and cons associated with 529 Plans.
Roth IRAs are another popular type of account to start saving for your child’s education; however, they are much more limited in terms of who can contribute to them and how much. Roth IRAs must be opened in your child’s name, and there may be minimum opening deposits and/or annual contributions. Roth IRAs also have income cutoffs, and must be opened at least five years before you plan to start withdrawing money for education expenses. Furthermore, any profits withdrawn from Roth IRAs are taxable. The upsides to Roth IRAs is that any unused money can be used to jumpstart your child’s retirement savings, and they are much more flexible in terms of investment options.
Prepaid Tuition
A number of states and private universities offer prepaid tuition programs that can help you save for your child’s education while protecting against tuition inflation. Basically, once you start the plan, you’ll be locked into that year’s prevailing tuition rates. For example, can prepay for a year of college tuition while your child is still in elementary school. Monies paid into prepaid tuition programs are generally transferable if your child decided to go somewhere else; however, the dollars may not stretch as far since you’ll be paying then-current tuition costs. A number of private universities also offer prepaid tuition programs. You can learn more about private college 529 Plans here.
Talk To Your Kids about Their Education Expenses
If you have specific questions about saving for your child’s education, you should meet with a qualified financial advisor who will be able to assess your individual situation and help you develop a plan that best suits your needs.
As the largest home builder in Charlotte, NC, True Homes understands that your family’s future is important. We offer a number of new home communities marketed towards new families with floor plans for every budget. To learn more about True Homes, visit us online at www.truehomesusa.com or call us on the phone at 704-271-1191.
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