A college education sets children up for great job stability and allows them more opportunities to learn and grow well into the future, so it's understandable that many parents want their children to pursue this path. Unfortunately, saving for college can be a major drain on parents, but you may not want to saddle your child with student debt.
Financial planning for college is essential for making the most of investments for your child’s education. Here’s what you need to know to start saving for college right away.
Start Saving Early with a 529 Plan
If you’re serious about saving for your child’s education, you may want to consider starting a 529 savings plan as early as possible. The funds contained within these accounts can be used to cover college tuition as well as K-12 tuition, apprenticeships, trade schools, and other qualified education expenses without disqualifying your child from financial aid eligibility.
529 plans allow you to contribute after-tax funds to an investment portfolio containing multiple types of securities such as mutual funds or stocks. This means that the money placed within the account may fluctuate as market trends occur.
However, the primary benefit here is that funds grow unfettered and are withdrawn tax-free for qualified educational expenses. If there are excess funds after your child has finished their schooling, a provision in the Secure Act 2.0 allows you to convert 529 funds to a Roth IRA so those 529 contributions will be available to you in retirement.
These college savings plans are state-sponsored so you may see some variations in the choices available to you for your investments depending on where you live. While you can select a 529 plan from any state, you may find more favorable options for your home state.
Explore Other Savings Options
While a 529 plan is an excellent means to start saving for higher education, it may not always be the best fit for you or your child. There are several other savings vehicles that you may want to explore before you settle on one particular method:
- High-Yield Savings Accounts: Savings accounts can be used for any purpose, and high-yield savings accounts allow your money to earn interest. If your child is uncertain about higher education, this method still gives them a great financial nest egg to pursue their dreams and future.
- Roth IRAs: Many people neglect the benefits of a Roth IRA, but they do not necessarily have to be used for retirement savings. Money can be taken out of a Roth IRA tax-free (though you will still need to pay income tax on it prior to investing it) to cover the cost of education. Whatever is left offers children a head start on retirement savings.
- UGMA and UTMA Accounts: These types of accounts allow you to invest funds on behalf of a minor child before they turn eighteen. While they can be used for education, your child may also choose to use them for a down payment on a house, a new car, or other necessary life items. Keep in mind that they do not have as many tax benefits as a 529 plan or a Roth IRA.
- Coverdell Education Savings Account: These accounts are very similar to 529 plans but have more benefits for K-12 education, allowing you to use them for books, supplies, tutoring, and more at eligible schools. They do have lower contribution levels and can only be used for families that fall below minimum income guidelines.
Get Your Child Involved
One of the best things you can do to help your child save for their college education is to get them involved early in the process. Through age-appropriate conversations, teach them healthy money management skills and instill financial values in them as early as possible.
At a young age, this can be as simple as introducing them to saving with a piggy bank. As they grow older and can understand more complex financial strategies, you can teach them the basics around money management, smart investments, and taxes.
Allow them to get involved with making some of the decisions regarding how money should be invested once they reach an age where they can understand the nuances of different investment vehicles.
Of course, financial health is not the only thing you should be teaching your child. You also want them to think about the legacy that you are leaving them and what legacy they want to leave for their own family one day. Money management is a piece of future happiness and success, but it is not the only thing that matters.
Re-Evaluate and Adjust Regularly
Regular check-ins are a necessity whenever you are saving for a major goal like college tuition. They allow you to touch base and see if you are on track for the savings goal that you want to hit and adjust accordingly if not. Other life circumstances may also dictate a need to adjust your savings habits, such as changes in income.
Throughout the process of saving for higher education, keep rising college costs in mind. Make sure that you are saving enough to cover the cost of tuition in years to come. You and your child can also look into scholarships that can reduce the net cost.
This may also be a great time to check in and see if your child still intends to go to college after their mandatory education finishes. You may want to alter your savings plan from a 529 plan to a Roth IRA or a UGMA/UTMA to give your child the financial head start that you want them to have, regardless of what their goals may be.
Financial Planning for College with Magellan
Having a financial planner on your side is essential whenever you consider making major savings goals of any kind. At Magellan, we specialize in offering advice and helping you adjust a portfolio to meet your goals. A plan catered to your unique portfolio, situation, and goals beyond a child’s higher education, including retirement, travel, and charitable giving.
If you are ready to strategize a plan to help your child prepare for college without sacrificing your own retirement or quality of life, contact Magellan today to schedule a time to talk with our expert team.