Children throughout the Kansas City area have begun heading back to school. For their parents, the beginning of academia is a good reminder to either set up or check in on their children’s college savings plans. For those who haven’t started a plan, rest assured that it’s quite easy. And for those who have already begun the process, we’ll discuss ways to continue to build your funds.
Many Ways to Save
Deciding how and how much you want to save for your children’s future tuition can be tough, but with the necessity of higher education in today’s society, it’s not a decision you should put off. The most common college savings plans are:
· 529 plans, which can be set us as prepaid tuition plans or as college savings plans.
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· Coverdell Education Savings Accounts (ESAs).
· Roth IRAs.
Each plan or account has its own pros and cons. If you go with a prepaid tuition 529 plan, you can effectively lock in your tuition costs at an exact rate when you open the account. With the way college tuition has increased in recent years (1,120 percent over 30 years, according to some studies), locking in a rate doesn’t seem like such a bad idea. http://www.huffingtonpost.com/2012/08/15/cost-of-college-degree-increase-12-fold-1120-percent-bloomberg_n_1783700.html
On the other side of the coin, the savings you put in a retirement (IRA) account are not considered assets on FAFSA (student aid) forms. Savings in a 529 plan are, and can reduce the amount of aid your child receives. A perk of a Coverdell Account is that you can use it for certain qualified elementary and secondary school expenses, too. And there are some personal aspects to consider as well.
What Works for You
When we had our first child, Jack, we thought we would just increase contributions to our own Roth IRAs in lieu of a 529 plan. Then, we quickly we learned that grandma and grandpa don’t get too excited about contributing to our IRAs. They do, however, get excited about 529 plans. So, we opened a 529 plan for Jack with a systematic deposit each month.
When our second son, Pete, was born we decided to increase our contribution to the same 529 plan rather than opening a second plan (and paying the extra fees that go with the plan), since the funds can be used for either child’s educational expenses. http://www.savingforcollege.com/intro_to_529s/name-the-top-7-benefits-of-529-plans.php
If you have a family member, like a grandparent, who wants to help out with college expenses, a 529 plan’s higher limits mean a single person can contribute up to $13,000 without triggering a gift tax.
Needless to say, deciding how you want to save for your children’s college tuition is a very personal process. If you’re still unsure of the best course of savings for your family, a certified financial planner (CFP) can help you decide. The sooner you start putting money away, the more you can save.
Kat's Money Corner is posted on Dollars & Sense every Tuesday. Kat Hnatyshyn, when not blogging or caring for her little ones, is a manager with CommunityAmerica Credit Union. For more financial chatter, click http://twitter.com/savinmavens.