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How to Plan Ahead for College Expenses

May 3, 2018 by

When you think of life’s biggest expenses,what comes to mind? A child’s first car, their wedding, buying a house, and of course, paying for college. College tuition is increasing at a rapid pace and if you currently have small children at home, you need to seriously be thinking about how you’re going to finance their college career. Whether they choose to attend a four-year school or opt for community college, it’s never too soon to calculate the expense of college and start saving. But what are the best ways to save money for college? Here are just a few of the most popular and practical options.

Roth IRA

A Roth IRA is a retirement fund where you contribute after-tax money that can be withdrawn at a later date, tax free. This later date is usually designated as age 59 and ½ or older. But if you plan to use your Roth IRA for your child’s college expenses, you can gain access to that tax-free money after just five years. Not only the money you put in but also any investments gains that were made over time. The withdrawal must be made for qualifying education expenses. There are some restrictions to keep in mind though, based on age and earnings so do your research before choosing this college savings option.

529 College Savings Plans

This may be one of the most popular ways to save money for your child’s college tuition. The 529 college savings plan is also known as QTP, or Qualified Tuition Program, and is currently available in 30 of the 50 states. Similar to a Roth IRA, you can invest after-tax money into this account and are allowed to withdraw the money, plus the investment gains, for approved educational expenses. These expenses include, but aren’t limited to tuition, annual fees, books and other supplies. There are limitations on contributing to these types of college savings plans as well.

The question also remains of what happens to the funds if your child doesn’t attend college? You have a couple of options including transferring the account to someone else or withdrawing the money while being hit with fees and tax penalties. The benefit to a Roth IRA versus a 529 college savings plan is that the Roth can still be used for your retirement in the event that your child does not attend college.

Prepaid College Tuition Plans

If you’re a planner (which you probably are if you’re reading this), than a prepaid college tuition plan might be perfect for you. It means that you can start making small payments towards your child’s college tuition now rather than later. What’s even better is the payments you make will be locked in at the university’s current price scale. This is ideal if you have children that are extremely young and you know tuition will be insanely high by the time they’re college-ready. The only hiccup here is that your child will need to attend the college of your choosing.

There are currently 12 states that offer this type of prepaid tuition program including Texas, Florida, Virginia, Maryland, Pennsylvania, and Massachusetts. Keep in mind that things can change between now and the time your child attends college. This means that you’re investing with the hope that the state of your choice will honor it’s financial guarantee in the future. This may or may not happen. Some colleges have withdrawn themselves from the prepaid college tuition plan option. And what if your child opts out of college? Find out more information before investing.

Gift of College

When it comes time for your child’s birthday or other special occasions, how many more toys and clothes do they really need? What if your family and friends could make a contribution directly to your child’s college savings? That’s exactly how gift of college funds work. These funds are connected to your 529 college savings plan. With the correct information, family and friends can make direct contributions at any time. But keep in mind that there is a 5% processing fee when someone gifts you money in this way.

Plan for Tomorrow, Today

People aren’t lying when they say that time flies. Your child may only be in elementary school now but before you know it, they’ll be applying to colleges. And when that time comes, you want to take part in their excitement, not feel bogged down by stress over tuition bills. By helping your child fund their college career, you’re helping them cut down on student loans and debt that will put them behind the eight ball following graduation. Start planning now to help build a brighter future for your children tomorrow.

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