Planning for the children education funds can be really frustrating because it involves a lot of money and the amount may get bigger in the future. Without any preparation, it’s going to be so tough for the parents later on. Luckily, there are some plans you can try which can make things easier for you.
529 College Plans
The way how this savings plan work is actually like this, you basically rely on your after-tax money. You invest such money into this plan and then, later on, you can withdraw the funds along with any possible gains you can get from such investment. And you need to know that this kind of investment is tax-free as long as it’s used for qualified education fees like college tuitions and also to buy some educational books. Furthermore, more than 30 states in the US offer this kind of college savings plan so it should not be hard for you to cope with it.
However, you need to know that each state has its own plan that covers different investment options operating costs, and also annual fees. Make it certain that you can really understand them all before you can really deal with this kind of investment so you can avoid facing disappointment in the future. What if your child doesn’t end up going up to college? What can you do with this investment? Well, you can still withdraw the funds but you need to face the tax penalties. However, you can actually transfer the funds to the other beneficiary.
In case you haven’t known about it, this kind of savings account is actually really popular. Basically it’s a tax-advantaged retirement savings but people can also use it for the other types of savings like for college savings. Similar to the saving method mentioned before, you use your after-tax money to cope with the investment. Then, after the age of 59 and a half year, the funds can be withdrawn if it’s for retirement. This kind of investment allows you to take out the funds tax and at the same time, you can also take out the penalty-free if the funds are going to be used for educational purpose as long as the investment has been more than five years.
Even better, you can also use this kind of saving for other purposes too like to make down payment to purchase a house and there’s no penalty to it. However, make sure you also notice that there’s an income and contribution limits for this kind of investment. If your earning is more than $129,000 per year, you are not eligible.
Prepaid College Tuition Plans
Just like what the name of the plans tells you, it definitely works like what it sounds. You can pay some portions of the tuition of your kids now and the price is locked in current prices. Let’s say that a college charges about $10,000 a year, if you make $5,000 contribution in this kind of plans, it means that you have actually bought 50% of a year’s tuition or you have secured a semester for your kid later on. But, if in the future, the tuition has increased to $20,000 a year, your $5,000 contribution will still value as 50% because the value has been locked. So you can say that your contribution of $5,000 is actually worth $10,000 if the tuition has changed into $20,000.