Discovering the best way to save for college can be quite the task and it challenging for most families. There is a sea of information out there in book, across the internet, and even knowledge from people you know. How can you truly discover the best way to save for college? There is really no one true way to save for college but there are multiple options that you may choose that will help you achieve your goal of saving money for college. There are many great ways to save for college, including coupons by answers.com which can save you on everyday products.
Among the vast array of investment options out there, there are three methods for saving for college that really stand out: college 529 plans, Roth IRAs, and scholarships. In this article, we’ll tackle each one of these ways to save for college and discuss both the positives and negatives of each.
College 529 Plans
Using a 529 plan is the most popular method for saving up for future college tuition. But what are they and how are they used? I’m glad you asked! The 529 plan was actually named after the section of the IRS code that allows states to designate accounts specifically for college savings. In theory, 529 plans are federally approved tax breaks at the state level. While they are operated by individual states, your state will typically offer tax deferred growth and special tax deductions for contributing to a 529 plan. To ensure that the money goes to your child in the case of a sudden death, make sure to set yourself as the account owner and your child as the beneficiary.
The 529 plans are broken out into two types: the college savings plan and prepaid tuition plans. College savings plans really give you the added flexibility of choosing your own portfolio and risk tolerance. This is ideal depending on how comfortable you are with the stock market stability at the time of investing. Money invested in college savings plans do not lock in rates, however you may use the money at college in any state that you choose. Prepaid tuition plans are a bit different. Prepaid tuition plans allow you to lock in tuition prices now and ensure you never pay more than what the current tuition rates are today. You must be a resident of the state you wish to open the account for. Prepaid plans are state specific so if your child ends up going to a college in another state, you must pay the difference for the out of state tuition cost.
Roth IRAs used for college
How many times have you heard that retirement investing should be more important than saving for your children’s college education? I say why not do both! Using a Roth IRA to save for college is a viable option that most Americans don’t know about. A Roth IRA at its core is a tax shelter for your money. You place post-tax dollars within a Roth IRA and let the money accumulate and build up through compound interest over time. Something most people don’t know though is that you can withdraw any of your contributions to a Roth IRA at any time. For example, if you contributed $5,000 each year for 10 years, that would be a total of $50,000. Since this is your contributed money, you can take out as much of these contributions as you want. This is a wonderful way to save for college as you can protect your income while saving for your children’s future.
Applying for scholarships
While not the easiest method for saving for college, it can be the most lucrative. Applying for scholarships is not only free money but there are no tax consequences or restrictions on the money. You can use scholarship money for book, tuition expenses, or room and board. You can scour the various scholarship sites and soon find yourself with multiple scholarships covering a significant amount of college tuition. Applying for scholarships will also teach your children how to manage their money and place the responsibility on their shoulders.
What method will you choose to save for college?
Now that you know the top three ways to save for future college tuition, what will you choose? College 529 plans are rock solid for flexibility and school choice while Roth IRAs will protect your income from unnecessary taxes. Then there are scholarships. Scholarships do require a bit of work but they can pay off big time. The next time you hear about a friend looking for ways to save for college, you will now be able to help with ease.