College education is expensive and will likely get more so as time goes on. The average tuition for the 2019-2020 school year ranged from $40,000 (for private colleges) to $11,000 (for state colleges), and has only gone up since then. If you are a parent or grandparent of young children that you hope will one day go to college, the best thing to do is to start saving for this major expense as soon as possible.
The following is a list of some of the most common and effective ways to save for higher education.
Open a 529 Savings Plan
The 529 Savings Plan is still the king of the hill in education savings. Assets inside a 529 Plan grow tax free and distributions for qualified education expenses come out tax free. These plans are commonly sponsored by states and states may allow a state income tax deduction for contributions, though there is not currently a federal income tax deduction available. One of the best parts of the 529 Plan is that anyone can contribute savings for a student. As such, it is an excellent way for parents, grandparents, and other family members to work together for a child’s education goals.
The keys to making the 529 Savings Plan work is by 1) creating it as soon as possible, and 2) making consistent contributions over the life of the child. Consistent contributions of just $100 per month for a child starting at birth will yield $21,600 of principal when the child turns 18, not counting the market growth that is likely to occur inside the account as well. A dedicated savings strategy to a 529 Plan starting at an early age will give the child the foundation he or she needs to successfully fund higher education pursuits.
Start a Roth IRA
While typically used for retirement, a Roth IRA can be an effective means to save for college. A Roth IRA will allow a person saving for a child’s education to put after-tax dollars into an account that grows tax free. Moreover, the owner of the Roth IRA may be able to take out savings from the Roth IRA without penalty to pay for qualified education expenses.
Compared to the 529 Savings Plan, the Roth IRA does have some limitations. For instance, only the owner of the Roth IRA can contribute to it, while anyone can contribute to a 529 Plan. Also, there are strict limits on how much a person can put into a Roth IRA. However, there is an upside. If the child does not actually end up attending a college or university, the Roth IRA can serve its usual purpose and provide for the owner’s retirement needs. With a 529 Plan, the money may be stuck behind a tax penalty if the student does not actually end up attending school.
Explore Permanent Life Insurance
Individuals typically pursue life insurance to provide for loved ones in case of their death. But life insurance can be more versatile than just providing a death benefit. Permanent life insurance—such as whole life and universal life—can accumulate value as premiums are paid. The value inside a life insurance account grows tax free and proceeds can be accessed at any time for any purpose, including education costs. However, a policy owner may need to be careful of penalties for draining a life insurance policy too early.
Life insurance is effective as education savings because the value of a life insurance policy does not count against a student when determining his or her eligibility for student aid. And, if the child does not end up pursuing higher education, then the life insurance value can be used for other purposes with no penalties or the owner can maintain the policy and simply allow the death benefit to pay when he or she passes away. For these reasons, life insurance is an extremely flexible way to save for any goal, including education.
Establish an UTMA (Uniform Transfers to Minors Act) Account
Specialized accounts for minors, such as an UTMA account (named for the Uniform Transfers to Minors Act), are an effective way to build a savings base for a child. UTMA accounts do not have to be used strictly for education, but these accounts are an effective way to set money aside for all of a child’s needs.
Read more at How Will You or Your Child Pay for College?
If you’re ready to start the saving for college discussion, contact a knowledgeable First Bank Wealth Management Financial Advisor today. Our team of experts can help guide you on the best college savings plans available and which one is right for you.
By: Charles Claver
Senior Vice President and Family Wealth Advisor
Charles Claver is a Senior Vice President, Director Investment Management & Trust and heads-up the Family Wealth Advisor team for First Bank Wealth Management. Possessing over 20 years of experience in the financial services field, his expertise includes private wealth, investment/retirement/estate, commercial/ personal lines of insurance, and private banking. You may reach him at (310) 887-0100 or via email at [email protected].