Your children are working hard on getting good grades, participating in extracurricular activities, and even volunteering within the community. However, those activities are just the beginning of getting into the college of their choice.
In addition to good grades and stellar letters of recommendations, proper financial habits can go a long way toward helping your achieve their educational goals.
Here are five ways that you can start saving for your child's education right now.
529 College Plans
529 college plans operate similar to IRA (s) and 401(k) plans in that they allow parents to save for their child's education through a variety of tax free investment options. These plans can offer big tax advantages since the gains on the accounts are tax-deferred. Once the funds within the plans are used to pay for college tuition, parents won't ever have to pay taxes on them.
Anyone can start a 529 plan in a child's name and make contributions as they'd like. The donor does control the account, however, until it is used.
Money in these accounts can be used for undergraduate or graduate studies at any accredited 2- or 4-year campus in the United States. Savings in a 529 plan belong to the parent, not the child.
UGMA and UTMA accounts
Another way to save for your college are UGMA and UTMA accounts. UGMA stands for the Uniform Gift to Minors Act and UTMA stands for Uniform Transfer to Minors Act. UGMA and UTMA custodial accounts offer standard tax breaks for children under 18.
In these accounts, the first $1,000 in gains is tax-free, the second $1,000 is taxed at the child's income tax rate and the remainder is taxed at the parent's income tax rate, according to the IRS. There are no restrictions on how the money can be used, just as long as it benefits the child in question.
Parents do have less control of how UGMA and UTMA accounts are used. Once the child reaches the age of maturity, which is 18 to 21 depending on the state, the child can use the money for what he or she decides and doesn't necessarily have to use it for college tuition.
You're probably already familiar with a Roth IRA. Parents can open a Roth IRA in their child's name once the child begins earning income. Children over the age of 18 do gain control of the account, however, restrictions on a Roth IRA keep investors from taking earnings out penalty free until the age of 59½. Early withdrawals are allowed under certain circumstances.
According to the IRS, if your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return.
There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, total contributions for the beneficiary in any year can't be more than $2,000, no matter how many accounts have been established.
Interest earned on Series I and EE savings bonds is exempt from federal income tax when it is used to pay for higher education. However, which college costs rising, the returns on savings bonds may not be at the rate you would normally want.
As with any investment, there are many more options to learn about and questions that Steel Valley Investment Group of Raymond James can help you with. Contact us today.