Education is an important pillar of human life, and as the child grows in age, their educational expenses also grow similarly. All the parents are fully concerned about their child’s education and want their child to gain more quality knowledge. If you are also worried about your child’s education, then its high time for you to start planning their college from a younger age.
College is a higher educational institution where students take admission to gain more knowledge of their respective fields. But do you know that getting admissions in a well-reputed college is not a rule of thumb, and can call for some big amount as fees? Yes, many of the reputed colleges demand a high fee structure for teaching your child. So better is that you start planning for college at an early stage.
Why do you need to save?
Saving for your child’s future college is your duty as a parent. No doubt, you can get a loan for your child’s education, which can be an educational student loan, but if you start saving at an early age, you may not require to take that hefty loans that can charge you huge interests. But getting a loan is also not that easy; you should clear all your debts first and have a clean earning image before the bank to grant you a loan.
After achieving your short term goals, are you ready to take retirement? Well, in our suggestion, if you are a parent, then you are not at all ready for retirement this soon. Getting retired means leaving the run of earning more money behind and relax. But being a parent, you have your responsibility towards your child, so to make your retirement early, you need to save for you and your family early. One way of doing that is opening an educational savings account.
Educational savings account
Opening a savings account helps maintain proper savings for your child’s college. Some specialized accounts may provide you some benefits on savings made for your child’s college.
The main three ways by which people use to save for their child’s future are:-
- UGMA/ UTMA Accounts
- 529 plans
- Roth IRA
There many advantages and disadvantages that can help you decide the best account for you.
- UGMA/UTMA Accounts
This account is a minor child account and can involve money through gifts or transfer to a child. You can also think that they are just standard brokerage accounts that are custodial to the guardian or the parent until the child turns a major. You can do all types of investments in stocks or any other place from this account, keeping in mind that all income earned are subject to taxable as a child’s income. So, in short, the account gives you maximum flexibility but is not tax-free accounts. So while choosing this account, keep in mind that the accounts are flexible but not tax-free.
- 529 plan
This is a kind of plan that was made for college savings only and which offers a lot of benefits to users. One of the main benefits of opening this account is that the money growing in this account grows completely tax-free and can be withdrawn tax-free when required for the educational purposes. What makes this plan more suitable for student savings purpose is that you can use up to $10000 per year tax-free for your child’s K12 tuitions, you can also use up to $10000 one time for student loan debt. This plan is for dependant students, and hence no amount is required to be shown or reported on the FAFSA at the time of withdrawals.
Keep in mind if the child doesn’t goes to college, there are only limited options to use account tax-free, and if the earnings are not spent on educational purposes, it can be subject to a 10% tax penalty.
- Roth IRA
There are few people who recommend you this account for your child’s future. There can be two different approaches that can be done to get this account
- Open a Roth IRA account for your child, but that child must earn an income to surpass the condition of this account
- Or open the account of Roth IRA on the parent’s name.
Though we are savings for child’s college, we must think for the first option, so having a Roth IRA account for your child and having some money in it, you will get the benefits like money can be withdrawn at any time for any reason. No penalty is raised when money is withdrawn for educational purpose.
There are some clear choices that you can make according to your savings habit, so plan wisely.