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Choosing the right college savings account can be a daunting task for the parents. If you choose the saving account early then it would potentially save your child from the negative long-term consequences.There are multiple methods to get you started and save your child from the student loan debt down the road.In the future when your child is in search of the financial aid or lookingfor scholarships, college savings account will be beneficial.By outlining the various optionswe will make the decision-making process easy for you.
As per the college board report, the annual fee for in-state residents for public universities are $11,000 annually whereas for private colleges it is $39,000 per year. This is the estimate for now but with the rising inflation if you consider thisamount after 6,7 yearsthen multiply this amount by fourand that’s a big number to save. For instance , if you have to pay the annual fee of $50,000 when your child reach the age of 18 , then you have to start saving the amount from now.You can do thequick math’s tohave a rough estimate of savings and then choose the viable college savings account.
Table of Contents
College Savings Account – Key Considerations
The key consideration for the college saving account is as follows:
- Look for the state tax benefits such as the sponsored 529 plans in which the earnings are not taxed until they are drawn for thequalified education expense
- Deeply analyzeand evaluate the investment options that are offered by various plans. Itis important toconsider the annual fees , investment management fee, administrative fees associate witheach plan.
- For the college saving account consider thecontribution limit and restrictionassociated with the accounts.Some plans have a higher contribution limit that means that you can save substantial chunk of money in saving
College Savings Account – Make the Smart Choice
- 529 plans
- Other college savings account options (UTMAs, UGMAs, Roth IRA, Trusts)
A 529 college savings account will let you invest in the exchange, traded funds, mutual funds, and other exchange traded funds. While the other one tuition plan lets you lock the overall tuitioncostand avoid theimpact of the increasing tuition charges .
529 College savings account
This one is the most renowned education-specific saving plan that offers two types of saving accounts namely investment saving account orprepaid tuition plan. 529 College savings account is a tax-advantaged investment vehicle that covers all sorts of educational expenses including tuition fees, books, room and other charges. This college account is very similar to a Roth IRA and has potentially higher contribution limits. Also, it is important to mention here that it’s solely for the educational expenses and does not include expenses like buying a car for the college. If you pay money for the nonqualifiedexpendituresthen10%penalty will be charged.
529 Prepaid Tuition Plan
One of the viable ways to lock the money for the tuition charges is through the 529 Prepaid Tuition Plan.By paying the cost of attending a particular university, you can completely hide the tuition hike charges. For instance you pay for your eight semester beforehand to save the additional costin dollars in future times.
Although major concerns are raisedon this prepaid tuition plans but still someinstitutions agree to the tuition fee beforehand. Some institutions have continued to operate theprevious plans buthave closed the program for the new students. Aswith the increasing concern about the future financial viability, restrictions are imposed on the prepaid tuition programs.
529 College savings account – Prepaid tuitionvs Education Saving Plan
| Feature | 529 Prepaid Tuition Plans | 529 Education Savings Plans |
| Purpose | Lock in tuition rates for future use at specific colleges or universities. | Invest funds in numerous investment options to grow tax-deferred or tax-free. |
| Structure | Fixed tuition contracts. | Investment accounts. |
| Flexibility | Limited flexibility in terms of changing beneficiaries and using funds for non-tuition expenses. | More flexible, allowing funds to be used for a wider range of education expenses, including room and board, books, and supplies. |
| Tuition Rates | Tuition rates are locked in at the time of purchase. | Tuition rates are not guaranteed and are subject to change. |
| Investment Risk | No investment risk, as the value of the tuition contracts is fixed. | Investment risk is present, as the value of the investments can fluctuate. |
| Tax Benefits | Offers tax-deferred or tax-free growth on earnings. | Offers tax-deferred or tax-free growth on earnings. |
| Account Ownership | Can be owned by the account beneficiary, the account owner’s spouse, or a family member. | Can be owned by the account beneficiary, the account owner’s spouse, or other eligible individuals. |
| Portability | May not be portable, meaning funds may not be transferable to another state’s plan. | More portable, allowing funds to be transferred to another state’s plan without penalty. |
| Contribution Limits | May have lower contribution limits than education savings plans. | May have higher contribution limits than prepaid tuition plans. |
Pros and Cons of 529 Plans
Pros
- The contributions in the account ca be used any time by thestudent throughout the life
- The account can be easily changed for the benefit of the individual educational expenses
- Thereis no income restriction soit’s abetter option college saving account
- This college saving account offers tax-free growth
- If parents own the account, then it has little impact on the financial aid awards
Cons
- The contributions can only be used to pay for the qualified educational expenses
- All the non-educational expensesare taxed
Other College Saving Account Options
As planning for the child’s education is an important step in securing their future. The college saving account is a viable approach to ease the financial burden.There are plethora of other college saving account options you need to consider.
Savings Account
These type of accounts offer the flexibility to drawmoney for the non- educational expenseswhich is beneficial and disadvantageous at the same time. If you spend a huge sum of money on non- college expenses that it would result in a depleted college fund.
Pros
- Offer the investment flexibility
Cons
- The tax benefits and returns are most of the time below the rate of inflation
Roth IRA
This one is another option in the list of the collecting saving account . These are tax advantageretirement accounts that can also be used to savemoney foryour child’s education. This retirement plan is less restrictive in comparison with the other retirement plan options.
Pros
- The funds in this account can be utilized for the child education or for the retirement life , as per your preference
- With this account you can easily withdraw the money tax-free as it is regarded as the qualified distribution
- The amount you save in thisaccount is tax-free
Cons
- The contribution limit is lesseronly $6,000per year and for age bracket above 50 it is$7,000
- The earnings that you withdraw before the age of 59 from this account is half taxed
How to save for retirement
As with each passing day, the importance of securing a goodretirement fundcannot be overstated. The tax – advantaged retirement accounts like 401(k) plan and Roth IRA are the viable approaches tobuild aretirement nest egg.
UTMA or UGMA
UTMA or UGMA accounts are also agood option as college savings account because they can help you hold the fundfor minors until they reach a certain age.The recipient will be hold in charge of the account in majority of the cases in the age bracketof 18-21.
Pros
- Funds can be used for educational purposes as well as for other investment purposes
- In this type of account anyone can easily make contribution in the form ofbonds, mutual funds, and stocks
Cons
- Can potentiallylower the amount of the need based financial aid for the student
Frequently Asked Questions
What is the best type of college savings account?
The best type of the college saving account is 529s. As they give users a tax advantageso they are primarily more advantageous for the students in the long run.
What are the three major types of savings account?
The three most common types of saving accounts are as follows:
1. Regular savings account
2. Money market accounts
3. Certificate of deposit
