3 Different Ways to Save for Your Child’s Education

​Struggling to save for your child’s education? You’re not alone. A recent study from from Fidelity, 70 percent of parents want to fully pay for their child’s tuition and education costs. However, the same study found that the average parents are on track to cover only 29 percent of the costs by the child’s freshman year.1
 
College is a difficult financial goal for many families. Unfortunately, it’s only getting more difficult. A recent study found that the average tuition for a private, nonprofit college rose 129 percent from 1988 to 2018. Tuition for public college rose 213 percent over the same period.2
 
You can use a wide range of accounts and tools to save for college. You may find it difficult to know which is right for you. Below are three common savings tools. Each offers its own benefits and considerations. Your financial professional can help you choose the strategy that’s right for you.

529 Plans
Many families choose to use the 529 plan to save for college. Its popularity is largely due to its unique tax treatment. You can contribute funds and invest them according to your goals and risk tolerance. The funds in the account grow on a tax-deferred basis. That means you don’t pay taxes on growth as long as the funds stay inside the account. All withdrawals are tax-free as long as the funds are used for qualified educational expenses.
 
Each state offers its own 529 plan, but you’re not required to use your state’s plan. If you do use the plan for your state, however, you may be able to deduct the contributions from your state income taxes. It’s also possible that another state’s plan may offer features and investment options that better fit your needs.
 
You could face taxes and penalties if you use the 529 funds for anything other than your child’s education expenses. That could be an issue if your child chooses not to go to college. Fortunately, you can always change the plan to benefit another child.


UGMA/UTMA Accounts
These unique accounts give parents the ability to control the funds and also allow for flexibility in how the money is used. UGMA and UTMA are investment accounts for minors. You contribute money on behalf of your child and then choose appropriate investments. Most of these accounts have a broad menu of investment options.
 
When your child reaches the age of majority in your state—usually either 18 or 21—the accounts transfer to their ownership. Your child can then use the funds as they wish. Also, while the growth in the accounts isn’t tax-deferred, it also isn’t fully taxable. Some growth is tax-free, and then, at additional levels, growth is taxed at the child’s rate.


Roth IRA
Are you one of the millions of people who use a Roth IRA to save for retirement? The Roth is popular because it can be used to create a tax-free income stream. However, you can also use it to pay for your child’s college. Typically, you face a penalty if you take withdrawals from your Roth before age 59½. However, you may be eligible for a penalty waiver if you’re using the funds to pay for education.

You can also take out your contributions from a Roth at any time without paying taxes or penalties. If you withdraw your contributions, however, you’ll reduce your balance and limit your growth potential in the future.
 
Ready to plan your child’s education funding strategy? Let’s talk about it. Contact us today at DSM Financial. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
 


1https://www.fidelity.com/about-fidelity/individual-investing/families-underestimating-future-college-costs
2https://www.cnbc.com/2017/11/29/how-much-college-tuition-has-increased-from-1988-to-2018.html
 

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