Dear Kim,
I recently had a baby and want to save for his college fund. How do people usually go about doing that? Should I squirrel the money away, put it in a savings account, or invest it? I want to set my child up so that he won’t have to worry about tuition, but I don’t even know where to start. Please help!
Sincerely,
Puzzled Parent
Dear Puzzled Parent,
Firstly, congratulations on your baby!
There are many routes when saving for your child’s college fund. Most people find that a 529 account is the easiest way to save. There are pros and cons to a 529, so lets discuss them.
One pro to a 529 account is that the money stays in the name of the owner of the account (often a parent of a grandparent). When you have a small child, there is no way to predict if the child will be responsible with money at 18. Thanks to the 529 account, you do not have to worry about the money as you would with a UGMA account, which grants funds to the child once they are 21. Many young people are not responsible enough to handle money at such a young age, which makes a 529 account ideal in this scenerio.
Another pro is the money in a 529 account grows tax-deferred and will come out tax-free if used for educational purposes (there are specific types of expenses that qualify). If the named beneficiary does not use the money, it can be passed to another family member or used by the parent for their own education, if desired.
Additionally, anyone interested may contribute to the account. For example, I put money into my grandchildren’s accounts.
Now, I will cover a few cons to choosing a 529 account as your way of saving for your child’s tuition. If the money is withdrawn for non-educational purposes, it will be taxed. Another downside is that there are specific guidelines as to what the funds may be used for. General expenses like tuition, room and board, and books are covered. Transportation is not covered. Be sure to research from a reputable source the specifics.
Another option is to save through a Uniformed Transfer to Minors account. I spoke a little about them in an earlier post. The pro is the money may be used for anything, including trips, vehicles, and anything else the child may want. A con is the money is considered an irrevocable gift, and the funds must be turned over to the child at the age of majority (usually 18 or 21). Also, the money does not grow tax-deferred.
Other options include using your ROTH IRA to pay for education, but that’s a little more complicated. Contact me if you’d like more information on that option.
I hope this helps! I’m always available to have a more in-depth discussion.
Sincerely,
Kim
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