Parenthood involves providing for your child, both now and in the future. Many parents are actively involved in helping fund their child’s future education. With so many savings options out there, which ones are the best? Here’s the lowdown on how to financially prepare for your child’s future goals.
Types of savings accounts
Katie Lobosco, contributor to CNN Money, recommends opening a 529 plan to help cover your child’s future education. This type of college investment account is available in most states and is often tax deductible. It’s a great, hands-off way to accumulate savings.
Another perk is that many 529 accounts allow you to put in as much as $300,000. The only stipulation with the 529 is that you must use the funds strictly for education or risk paying a hefty fine.
Coverdell Education Savings Accounts (ESAS)
This type of account is similar to the 529, though it has slightly different terms. A Coverdell ESAS provides a tax-free way to house your contributions toward your child’s education.
Per Whattoexpect.com, a benefit of an ESAS is that you can use the funds to help cover elementary and high school costs, too. You can also make adjustments to the account at any time. One downfall of an ESAS is that you can contribute only $2k per child on an annual basis.
Prepaid Tuition Plans
Per Christina Couch, contributor at Bankrate.com, if you know that your child is going to attend a state college, a prepaid tuition plan is a great way to go. It enables you to pay for tuition credits ahead of time, at a set rate. You can change beneficiaries on the account at any time. Since this type of savings option prioritizes local institutions, be aware that if your child chooses a university out-of-state, you’ll receive a refund that’s lower than the amount you originally invested.
How soon to start saving
Like with any financial goal, the sooner you begin saving for your child’s future, the better off you’ll be. Reyna Gobel, contributor to U.S. News, advises that you should start saving for each child even before they’re born.
Consider opening a 529 plan and asking for monetary gifts from those who attend your baby shower. Depending on the type of 529 account you open, some allow family and friends to donate money online into the fund.
How much to save
While some financial experts currently recommend saving a sum of $100k per child, Mark Kantrowitz, senior vice president of Edvisors Network, has a more feasible goal for parents. He recommends saving one-third of your child’s expected higher education costs.
Kantrowitz’s strategy involves a three-stage approach to paying for college. This first one-third is based on past income, while you’ll pay another one-third when your child enrolls in college. Lastly, he estimates an additional one-third that you’ll pay in the form of loans when your child graduates college.
The cost of education can be high, so make sure that your child has access to the best resources by implementing these savings strategies.