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A Quick Start Guide to 3 Investment Vehicles for College Savings

by Janessa Lee

In an era where college tuition costs continue to skyrocket, it is crucial for parents to plan and save for their child’s education. According to data from EducationData.org, college tuition has surged by a staggering 747% since 1963, when adjusted for currency inflation. Furthermore, from 2010 to 2022, college tuition costs experienced an average annual inflation rate of 12%. These statistics highlight the importance of starting early and exploring effective investment vehicles to achieve your college savings goals.

One popular option for college savings is the 529 Plan. A 529 Plan is a tax-advantaged savings account designed specifically for education expenses. It allows individuals to invest for a beneficiary’s future educational needs, including private K-12 schooling, traditional college, and apprenticeships. There are two primary types of 529 Plans: Education Savings Plans and Prepaid Tuition Plans. Education Savings Plans offer flexibility as savers can invest in various portfolio options such as mutual funds or ETFs and use the funds for tuition, mandatory fees, and room and board. On the other hand, Prepaid Tuition Plans enable participants to secure today’s tuition rates for future educational costs, effectively locking in the expense of tuition alone. However, Prepaid Tuition Plans may have limitations if the child opts for an out-of-state or private college.

Another option for college savings is utilizing UGMA/UTMA Custodial Accounts. UGMA and UTMA accounts are custodial accounts created to hold assets for a minor’s benefit. Unlike 529 plans, UGMA/UTMA accounts have no restrictions on usage and no contribution limits. Once the beneficiary reaches the age of majority (varies by state), the account funds become theirs. These funds can be used for educational expenses, starting a business, or making a down payment on a home. However, UGMA/UTMA account assets are considered the minor’s assets and are factored into the FAFSA calculation. This could potentially reduce the minor’s financial aid eligibility, which is an important factor to consider.

Lastly, Roth IRAs, originally designed for retirement savings, can also be used for college savings. Roth IRAs allow tax-free and penalty-free withdrawal of contributions at any age. Contributions are made with after-tax dollars, and the annual contribution limit in 2023 is $6,500. While earnings withdrawn beyond the initial contributions may be considered taxable income and could incur a 10% early distribution penalty, qualified education expenses can avoid the penalty. It is important to note that Roth IRA distributions are considered income and can potentially reduce your child’s financial aid eligibility.

When it comes to saving for your child’s education, it is important to consider your unique financial situation and aspirations. Each investment vehicle has its advantages and considerations. Starting early and utilizing time as your greatest ally can make a significant difference in achieving your college savings goals. It is also crucial to seek professional advice from a financial advisor who can help you craft a strategy aligned with your objectives.

In conclusion, saving for your child’s college education is a significant financial commitment. The rising costs of tuition make it even more important to explore investment options that can provide growth and tax advantages. By making informed choices, starting early, and seeking professional advice, you can set your child on a path to a bright and financially secure future.

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