School is back in session, the leaves are changing, the weather is cooling down, and football is finally back—there’s always a lot happening in fall! September is also National College Savings Month, a time to celebrate the power of investing in education and securing a brighter future for our children and grandchildren. As a Financial Advisor, saving and investing for children and grandchildren are part of our financial planning process.
What is National College Savings Month?
National College Savings Month is an annual observance designed to raise awareness about the importance of saving for higher education. It’s a chance to shine a spotlight on the potential of college savings plans and their impact on shaping students’ lives.
In today’s world, with the growing cost of higher education, saving for college can seem a challenging task. With a bit of planning and thoughtful decision-making, we can create a brighter future for our children.
In honor of National College Savings Month, let’s explore some tips and tricks for saving for education.
Tips for Saving for College
According to the Education Data Initiative, the average cost of attending college (i.e., taking a four-year undergraduate degree program at a postsecondary institution) is $26,436 per student per year.1 With this figure in mind, it’s obvious why saving for college is a major financial goal for parents. Below are several tips to help save for college:
Early planning is key to successfully saving for college. By starting to save as soon as possible, you can take advantage of the power of compounding interest, allowing your funds to grow over time. Time is valuable in building a substantial college fund.
Creating a carefully planned budget is essential. Knowing your income, expenses, and how much you can allocate to your college fund each month will help you stay on track and meet your goals. Even modest contributions can make a significant difference over time—remember, consistency is key.
Choose the Right Investment Option
Selecting the appropriate investment option is critical to optimizing your college savings strategy. Options such as a 529 plan, a Coverdell Education Savings Account (ESA), or a custodial account have unique features and benefits. Since parents have different goals in mind for their children, research and compare these options to find the one that aligns best with your college savings goals.
How to Save for College
There are many different college savings options available, and it is important to choose the one that best suits your financial goals and needs. Below are three of the most common college savings vehicles:
A 529 plan is a tax-advantaged savings plan designed to help families save for future education expenses. Contributions to a 529 plan are made with after-tax dollars, and the earnings grow tax-free.2 When withdrawals are used for qualified education expenses, they are exempt from federal taxes.
Each state typically offers its own 529 plan, and you may have the flexibility to choose any state’s plan that suits your preferences. If a resident in a state that has state income tax, it's important to be aware that some states may provide additional tax incentives to residents.
Coverdell Education Savings Account (ESA)
A Coverdell ESA is another tax-advantaged option for college savings. Similar to a 529 plan, earnings in a Coverdell ESA grow tax-free. Contributions are limited to $2,000 per year per beneficiary, and the funds can be used for qualified elementary, secondary, and higher education expenses.3
Eligibility for a Coverdell ESA is subject to an income test, so this type of savings vehicle may not be available to everyone.
Opening a custodial account, such as a UTMA or UGMA account, is a another way to save for a child’s education.4 With this type of account, an adult custodian manages the funds on behalf of the child until they reach the age of majority. There are no restrictions on how the funds can be used, which provides considerable flexibility, even beyond education.
It’s important to note that custodial accounts lack the tax advantages of 529 plans and Coverdell ESAs; however, they can still be a quality option for saving for children.
National College Savings Month is an excellent opportunity to take proactive steps toward securing a solid educational foundation for your loved ones. While the journey may seem challenging, remember that every contribution counts! As a Financial Advisor in Murfreesboro, TN, we enjoy helping parents and grandparents save for the children and grandchildren. Providing an education is a gift!
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.