4 Ways to Save Significant Money for College
A college savings plan is an important aspect to any parent or guardians future goals for a child. College tuition could, potentially, be one of the largest and most significant expenditures that you make in your lifetime. If you have multiple children, the financial commitment associated with college tuition is compounded. Coming up with money for college is a challenge that millions of people face throughout their lifetime. Fortunately, for families that have a desire to save money for college, there are more options today than ever before. In this article, you will be introduced to various college savings plan options that will assist you in obtaining the funds that you require to help a child further their education when the time comes.
Qualified Tuition Programs
These programs are often referred to as “529 Plans”. When researching these programs, you will find that there are two types. The first is referred to as the “529 Prepaid Program” and the second is referred to as the “529 Investment Program”. While each of these programs offers unique tax benefits, they operate in different fashions. If you opt for the prepaid program, you will be required to make a payment now or numerous payments over a certain period of time that allows you to commit to paying for future tuition fees that cover a certain amount of credit hours at a particular facility of higher learning. The investment program, which is often called the “College Savings Plan”, will allow you the opportunity to open an account and make regular contributions for any individual that you elect to provide to for college. The benefits associated with these types of college savings plan include, but are not limited to:
- Most of the qualified tuition programs are managed by professional investment experts.
- These programs have a high level of flexibility as far as changing the beneficiary and rolling over to a different state without having to suffer from federal taxes.
- The programs allow you to invest as little or as much as you like.
- You maintain complete control and ownership of the program.
Coverdell Educational Savings Account
The next type of college savings plan that you may consider when saving money for college is the Coverdell Educational Savings Account. This allows just about anyone to donate money to a special account that is considered to be tax-advantaged for the purpose and intent of paying for future education. The earnings that this type of account accumulates are considered to be tax-deferred and individuals may withdraw money out of this account without having to pay federal taxes as long as the money is placed towards educational expenses. The advantages of this type of account include the following:
- This account may include a wide variety of investments, including mutual funds and stocks.
- This type of account has a very broad definition as to what counts as educational expenses.
- Due to the fact that this type of account is created by the government, it has a high level of simplicity.
UGMA and/or UTMA Accounts
This type of college savings plan is a special type of account that is owned by a child; however, due to the age of a child, the account is placed within the control of a specific custodian. This is typically the parent or the guardian of the child. UGMA stands for “Uniform Gifts to Minors Act” and UTMA stands for “Uniform Transfers to Minors Act”. You may set up a special custodial account at just about any type of financial institution. It is similar to a donation account, except the funds are utilized to pay for college.
Taxable Investment Accounts
The next type of college savings plan is referred to as a taxable investment account. This involves investing educational-based savings into a mutual fund that is taxable, or a special brokerage account. You have the ability to design the portfolio associated with this account in any way that you desire and there are many different investment options with this type of account. The main advantage to this type of account is that you will be able to pay lower levels of capital gains as far as tax rates are concerned. Additionally, once you transfer the money from the account to your child, it will be reported on their tax return. Unfortunately, if the money is not used for qualified educational expenses, you could incur a penalty rate of 10%, as far as taxes are concerned.
As you can see from the information contained within this article, there are several different types of college savings plan options available to families that have a desire to save money for college. Before choosing a plan that is right for you, it is in your best interest to seek the opinion of a professional investor. Not only will this individual be able to outline which type of plan is best suited for your needs, they will also be able to appropriately outline both the pros and the cons associated with each plan. This will ensure that your child gets the most benefits possible out of their college savings plan.