September is College Savings Month | Our Financial Advisors Discuss Selecting the Right Savings Plan
With the weather getting cooler, leaves starting to change, and kids going back to school, it means that September is here again. This means that it’s National College Savings Month, a fantastic time to look into how you can invest in education to secure a brighter future for your children and grandchildren.
As the cost of higher education continues to grow, saving up for a higher education can seem like a challenging feat. But with a bit of planning, thoughtful decision-making, and guidance from one of our advisors, you can create a brighter future for your children.
Check out these important tips to help you along on your college savings journey:
Start Early
When it comes to saving for college, early planning is the key to success. When you start saving as soon as possible, you can take advantage of the power of compounding interest, allowing your funds to grow over time. The earlier you start investing, the more time your money has to grow.
Budget Wisely
Making sure saving fits into your budget is essential. Knowing your income, expenses, and how much you can afford to save will help you stay on track to meet your goals. It’s a good idea to sit down and make a budget to help set yourself up for success. Even small contributions can make a big difference over time if you are consistent.
Choose the Right Investment Option
There are several different investment options for college savings out there. Choosing the right one is vital to optimize your savings plan. It’s important to research the different plans to find the one that aligns best with your savings goals.
529 Plan
A 529 plan is a tax-advantaged savings/investment plan designed to help families save for the future education expenses of a designated beneficiary. Contributions to a 529 plan are made with after-tax dollars, and the earnings grow tax-free.1 When withdrawals are used for qualified education expenses, you do not have to pay income tax on the earnings.
Contributions to a 529 plan can be used to pay for higher education, K-12 education tuition, student loan repayments, and even apprenticeship programs. Another great advantage of this plan is that if there are funds leftover, they can be used to contribute to a Roth IRA.1
It’s important to note that different states offer different 529 plans and you could have the option to choose the one that best suits your savings needs. Research your options to see which state’s plans you are eligible for and which offer you the best incentives.
Coverdell Education Savings Account (ESA)
A Coverdell ESA is another tax-advantaged option for college savings. Like a 529 plan, contributions in a Coverdell ESA grow tax-free, however they must be made in cash. While there is no limit to the number of accounts that a beneficiary can have, there is a contribution limit on all accounts of $2,000 per year for that beneficiary. 2
Eligibility for a Coverdell ESA is based on an income test, so this type of savings plan may not be available to everyone.
Custodial Account
Opening a custodial account, such as a Uniform Transfers to Minors Act (UTMA) or a Uniform Gifts to Minors Act (UGMA) account, is a simple way to save for a beneficiary’s education. With this type of account, an adult custodian manages the funds on behalf of the child until they reach the age of maturity. There are no restrictions on how the funds can be used, which provides considerable flexibility. It’s important to note that the account is held under the minor’s Social Security Number, so the earnings are taxed as the minor’s income.3 These Custodial Accounts do lack the tax advantages of 529 plans and Coverdell ESAs; however, they can still be a viable option for some investors.
National College Savings Month is a wonderful time to take proactive steps toward setting up a solid educational future for your loved ones. While the journey may seem difficult and daunting, remember that every contribution, no matter the size, counts.
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1: https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan
2: https://www.irs.gov/taxtopics/tc310
3: https://investor.vanguard.com/accounts-plans/ugma-utma
This content is developed from sources believed to be providing accurate information and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security