Child education savings plan is an important decision. Each parent wants to give all the best to his child, and certainly, the best decision is to give him the best education. Also, this will certainly enable your child financial stability.
Thanks to child education savings plans, your child will not have to take student loans that would affect their finances for many years.
So, how to make wise financial investments for a child’s future?
Create a strategy for your child education savings plan
Every family is different. So, you have to plan and decide on the savings strategy that suits you best. Take special care on your cash-flow patterns and investment style.
Starting early would help you to realize your goal easily
Smart investing is important! But, the fact is that you simply can’t make up for the lost time when it comes to investing. The best time to begin your child educational savings plan is in your child’s first year. But if by then you didn’t start, do not worry, it is never too late to start.
Contribute Often to your child education savings plan
Make a plan of monthly, quarterly or annual contributions. Start as little as US$50 per month. Don’t think that this is a small amount, after 18 years of good investment, it will be enough to pay for all your educational expenses. That is the power of compounding. Make it your friend.
Also, setting up an automatic withdrawal from your bank account for transfer into your child education fund can be a very smart idea. This will ensure that you do not forget a payment.
Inform grandparents and relatives about your plan. They may decide to contribute to the fund over time instead of a birthday gift. You will agree that this is a great alternative.
TIP: If your child decides not to go to college or university, don’t worry. At first, you may be disappointed, but look at the situation as a whole. Your child may want to be an entrepreneur. Therefore, this money can enable him to start his business.
Think of the child education savings plan as a great opportunity to support your children’s plans for their future.
Focus On Preservation Of Capital And Steady Income
Keep in mind that this is an investment for your child, not for you. So, if you comfortable to take over the risk associated with your investment, don’t do that with your child funds. That fund should not be exposed to significant risk, for example, in a volatile stock portfolio.
You should invest in stable, long-term investments that preserve the capital you put in. This will allow for steady income and modest growth over the duration of your holding. Bonds, bond funds, balanced stock-bond mutual funds, deferred annuities, endowments. Even money market instruments can be ideal for education savings.
TIP: Get informed about tax benefits. Take advantage of any tax deduction opportunities available that reward educational savings.
What options do I have to save for my child’s education?
The Roths are one savings vehicle that is often overlooked as a way to fund a child’s college education. Roth IRA as a terrific method to save for retirement, but you can use Roth as a great tool to help you cover Junior’s university tab.
Roth IRAs give you freedom and flexibility on how to invest your funds. Because of this, it is a perfect choice for your child education savings plan. You can generally choose to invest your money in almost any type of investment. Also, you will have complete control over fees paid if you decide to use mutual funds or ETFs.
The money from the Roth IRA isn’t tax-deductible. But do not worry, the money will surely be multiplied and allow you to pay for school, buying the first house, and, eventually, retiring.
After five years, you can withdraw any and all principal (but not growth), even if it’s not for a qualified purchase.
529 plan as an option of child education saving plan
529 plan is investment vehicles that allow your money to grow on a tax-free basis until you withdraw it to pay for higher education. This is definitely one of the most popular ways of investing for a college
They are state-sponsored programs, usually managed by a financial services firm.
According to your risk tolerance, you can choose from a variety of investment options for your funds. This also depends on your investment time horizon (When your funds will be needed).
If you’re not satisfied with your plan’s performance you can switch 529 plan once every 12 months.
For independent schools, a major change in the Tax Cuts and Jobs Plan passed by Congress in late 2017 is that tax-free 529 savings plans — originally designed to encourage parents to save for their children’s college tuition — can now be applied to K-12 education.
Key benefits of a 529 savings plan
- Tax benefits: When distributions from the plan are used for qualified higher education expenses such as tuition, room, and board, books, there are no federal taxes
- The availability of such tax or other benefits may be conditioned on meeting certain requirements.
- Flexibility: Use can use money from 529 plan to pay eligible accredited post-secondary institutions nationwide. Also, you can use up to $10,000 annually to pay for elementary and secondary school tuition.
- Eligibility: Anyone who is a U.S. citizen or legal U.S. resident can make contributions, regardless of income.
College 529 plans offered by each state are not the same. They differ significantly in features and benefits. Every investor has his or her individual objectives and circumstances. So to choose an optimal plan for each investor should consider each plan’s investment options, fees, and state tax implication.
NOTICE: If you use funds for non-college related expenses you will have to pay tax on the earning and a 10% penalty.
Coverdell education savings accounts (ESA)
Another great investment option for your child education savings plan is certainly Coverdell education savings accounts. Also familiar as ESA. It is a federally sponsored, tax-advantaged, trust or custodial account set up to pay for qualified education expenses.
This child education savings plan has a certain age-related limit. ESA can be opened for any student who is under the age of 18 years. However, that funds must be withdrawn by the time the student reaches the age of 30. But there is an exception to this rule. Accounts for beneficiaries with special needs generally are not subject to the age restrictions on contributions and withdrawals.
Contributions are limited up to $2000 per year. Is not tax-deductible, but growth and distributions are.
Coverdell ESA distributions may be made at any time. The fund must be used on qualified education expenses. In this case distribution generally will not be considered taxable income for the beneficiary. Otherwise, you can expect to pay a penalty.
These terms referring to the Uniform Gift to Minors Act and Uniform Transfer to Minors Act. These accounts are considered the granddaddy of college savings accounts. UGMA and UTMA are nothing more than custodial accounts. It’s used to hold and protect assets for minors until they reach the age of majority in their state ( which is 18 to 21).
These accounts allow stock, bond, and mutual fund investments. They don’t allow higher-risk investments like stock options or buying on margin.
As long as the expenses are for legitimate needs, a custodian can initiate a withdrawal for the benefit of the child. These expenses are not limited to education and can be used for anything related to the child. This is big advantage related to other college savings accounts.
When it becomes adult, the child will be able to use the money without limitations.
Many experts consider that the bad side of UGMA and UTMA is that parents have less control over how the child eventually spends the money. But that is the purpose of these accounts. There are vehicles for passing on accumulated wealth to the next generation.
Any unused funds must be distributed until the child reaches the age of majority. UGMA and UTMA, doesn’t offer the ability to transfer the account to another child or change beneficiaries (Allowed on Coverdell ESA’s and Section 529 plans).
Some people really think that it is not necessary to save for schooling. It’s a big mistake. Just look at the burning issue of a student loan. Is getting bigger every day.
Your present day will be condemned by a child on a student loan that will be repaid for many years.
As noted above, these four child education savings plan will allow you to save. This also will allow you to participate in a beautiful future of your child. And if your child decides not to go to college, you will have a great asset. You can use them for your or your child.
Think about you. Address your own long-term financial circumstances. Do not start saving for education before you do that. Future is unpredictable and you can’t expect that your child finances your retirement.