This is a sponsored post from Upromise. All opinions are 100% our own.
If you want to know the best ways to save for college but you’re not sure of your options, you’re not alone. Like many parents, you want to help your children pay for college without wracking up student loan debt.
This will give them a strong step towards achieving financial freedom in their adult lives, but the options of saving for college are overwhelming, and it’s hard to know where to start!
It’s time to get the right college savings plan in place now so you can pay for college costs without emptying your wallet when the time comes.
Different types of investment plans work best in different circumstances and financial situations. For many people, a 529 plan with Upromise is a great choice for saving for college expenses.
Other places to save for your kid’s college expenses include Roth IRAs, brokerage accounts, bonds, custodial accounts, or education savings accounts.
This article will help you make an informed decision about which options will help you meet your financial goals, whether that’s paying for college fully, helping your kids with tuition, or even simply covering room and board expenses at their future college.
6 Best Ways To Save For College
1. 529 Plans
529 plans are one of the investment plans that allow you to save money for your child’s future education costs. The tax benefits of 529 plans make them one of the best ways to save for college.
Your after-tax contributions grow tax-free, and all of the earnings can be withdrawn without being taxed as long as they’re used to pay qualified higher education expenses.
The Upromise 529 college savings plans allow monthly bank contributions, plus contribution gifts from friends and family for birthdays and graduation!
It also had other opportunities to add money to your savings- you can get a Mastercard with your account to earn cash back rewards that are automatically deposited to the 529!
You can choose to invest in a 529 plan that is sponsored by the state where you live or one that’s sponsored by another state.
Contributions may be deductible on your state income tax return if you are contributing to an in-state plan. Some states even offer an income tax deduction for any 529 plan even if it’s in a different state.
Open a Upromise 529 for free today to get a $30 sign-up bonus to start off your college fund!
- Anyone over the age of 18 can open a 529 plan, no matter your gross income.
- Your money contributions grow tax-free, and you aren’t charged tax as long as the funds pay for qualified college costs.
- If you decide not to use this account for one child’s education costs, you can always change the beneficiary to another family member.
- You have flexibility in using the funds, such as using your 529 distributions to pay tuition for elementary school or secondary public or private school. Up to $10,000 can also be used to make qualified payments on student loans.
- 529 plans have favorable financial aid treatment because they are typically considered parental assets on the Free Application for Federal Student Aid (FAFSA), which negatively affects financial aid eligibility than student assets.
- You pay income taxes and a 10% penalty on 529 plan withdrawals if the funds are not used for qualified expenses like college tuition, fees, room and board, textbooks, etc.
2. Roth IRAs
While IRAs are typically thought of as retirement accounts, they are another good way to save money for your kids’ higher education expenses.
You have a multitude of investment options inside a Roth IRA such as mutual funds, real estate investment trusts (REITs), bonds, and more.
Once the account has been open for 5 years, you can withdraw your contributions (but not your earnings) at any time without paying taxes or penalties.
Contributions to a Roth IRA are not tax-deductible. However, unlike 529 savings plans, the funds in your IRA do not have to be used for qualified education expenses to avoid taxes and penalties.
- You can use the money for any purpose rather than being limited to paying for only college expenses like tuition.
- This is a tax-advantaged account and your investments grow tax-free.
- There are lots of investment options inside an IRA.
- Contributions to a Roth IRA are capped at $6,000 per year as of 2021.
- You must wait 5 years after your first contribution before you’re able to withdraw without penalties.
- Since IRAs are retirement accounts, withdrawing earnings before age 59 ½ will result in penalties and taxes due on those funds.
3. Brokerage Accounts
Brokerage platforms are used to invest your money in stocks, mutual funds, bonds, and more- they’re very popular with advanced investors to make passive income, but you can also use them to your advantage to save for college.
Brokerage accounts are not tax-deferred so you’ll pay taxes on what you earn, and you may be required to pay taxes on capital gains as well.
However, you can contribute however much you want no matter what your income is and you can use the gains however you wish.
A downside to brokerage accounts is that they are counted in your assets when calculating financial aid, and can negatively affect your child’s financial aid eligibility for student loans.
- There are no income limitations for starting brokerage accounts.
- There are no contribution limits, so you can invest as much as you want in a brokerage account.
- You can use this money to pay any expenses, not just ones that are “qualified.”
- There are no tax benefits of this type of account.
- These accounts are not favorable to getting financial aid.
- How much you gain in investments is up to your portfolio decisions.
4. U.S. Savings Bonds
Savings bonds can make a good addition to any college savings strategy because they’re backed by the government, may have guaranteed returns, and may be inflation-adjusted.
You can buy both EE and I bonds online through the government website Treasury Direct, both of which are tax-exempt when used as directed for tuition.
With EE bonds, you’ll earn a fixed rate of interest over the life of the bond, and the government guarantees that it will double in value by the date it matures.
In contrast, I bonds have both a fixed interest rate and adjustable, inflation-based interest rate, but no guaranteed value.
A huge drawback is that the bond is only for tuition costs- the funds can’t be used for room, board, books, or extracurricular activities under the education savings bond program.
- As long as the savings bonds are used to pay for qualified expenses, the earnings on the bonds are tax-free.
- Bonds are safe, low-risk investments that are not subject to market fluctuations and are protected against inflation.
- There is a limit to how much you can buy- bonds may be purchased in increments of $50 up to a maximum of $10,000 per year per Social Security number.
- If your child doesn’t use all of the savings bond earnings in the same year they’re earned, they can’t reap any benefits from an increased interest rate when it’s time to cash them in at maturity.
- Typically savings bongs have lower returns than stocks.
- These can only be used on approved tuition-related costs and nothing else for college.
5. Custodial Accounts
A custodial account, often called “UGMA” (for Uniform Gift to Minors Act), is an investment account that allows someone under the age of 18 to own investments and other types of property.
When your child turns 18 years old, they will get complete control over this account, but until then, the custodial duty is usually taken on by one of the child’s parents or whoever opens the account.
The custodian in charge of the account must act in the beneficiary’s best interest when making management decisions in the fund.
You can purchase publicly traded assets inside of the UGMA, including bonds, mutual funds, and stocks. But you are not permitted to invest in things like derivatives or buy on margin.
- You can use this account to save for any expense your child incurs, not just college.
- Earnings are taxed only at the minor’s tax rate, not the parents’ tax rate.
- You can contribute up to $15,000 per year (or $30,000 for a married couple) without getting hit with the federal gift tax.
- Contributions are not tax-deferred nor income tax-deductible.
- Money in the account is considered an asset of the child. When applying for financial aid this may impact their ability to get a student loan.
6. Education Savings Account (ESA) or Education IRA
A Coverdell Education Savings Account (ESA) is a tax-advantaged account that can fit quite well into your college savings plan.
Also known as education IRAs, ESAs are very similar to 529 plans. Your earnings and withdrawals are not taxed as long as they are spent on qualified education expenses.
The main difference between an ESA and a 529 plan is it has a significantly lower contribution limit of only $2,000 per year.
One great thing about ESAs is that anyone can open one, not just the parents or legal guardians of a minor! Their godparents or even parents’ friends are able to open an ESA for them to help with college costs later on.
You can also use an ESA to save money for K-12 tuition expenses up to $10,000, as well as supplies, books, and tutoring associated with enrollment at an eligible school.
- You have more control over your investment options compared to a 529 plan, which has more limited investment options depending on the program manager.
- The ESA is considered an asset of the parents, not the child, when applying for a student loan or other financial aid.
- The account earnings and withdrawals are tax-free when spent on education costs.
- Income limits of $95,000 for single filers or $190,000 for joint filers (with phase-out limits) may mean your family is not eligible for an ESA.
- Lower maximum contribution limits per child, at $2,000 per child per year total (regardless of how many people contribute for the same child).
- The ESA cannot be funded after the beneficiary turns 18.
- If the funds in the ESA are not used for college, they will be distributed to your child rather than refunded to you when the child turns 30 and the distributions are subject to earnings tax and a 10% penalty.
3 Tips To Saving For College
1. Budgeting & Frugal Living
To start saving money for college, it is important to create a budget. If you need help with this, we suggest using Mint to figure out how much you’re spending and even get on track to save for college.
When you’re just starting to save money and have no savings accounts, the CIT Bank Savings Builder account is good to start saving your own funds before you have college savings plans figured out.
An easy way to live more frugally is by getting cash back when you shop. These small amounts of savings add up and will translate to less student loan debt for your children when they go to college.
2. Setting Financial Goals
You’ll want to figure out how your college savings plan fits into your overall financial plan well before your kids enter high school.
If your kids are already growing up quickly, there are still ways to save money fast so you can grow your college savings as soon as possible.
First, decide if you’re saving for your children to attend state public college or private college since these could mean very different dollar amounts.
Once you have a goal, you can figure out what steps you need to take to get there.
For instance, if your goal is to save $25,000 towards your child’s college education by the time they go off to school, you can do the math to see how much money you’d need to save each month until they finish high school.
Or, maybe your goal is to max out your contributions to a certain type of tax-advantaged account each year. Knowing this contribution amount will help you know how much you need to find in your budget to meet your college savings goals.
3. Invest To Earn More
If you’re saving money for a goal that’s far out in the future, like your young child’s eventual college education, compound interest will help it grow faster over time.
Rather than keeping money in a savings account for 18 years, you can earn more money by investing it.
Getting started with investing is easy and there a lot of opportunities you may have never heard of, including college saving plans.
There are several different types of investment accounts available for college savings. Upromise 529 Plans, UGMAs, Roth IRAs, and Coverdell ESAs are all examples of ways to invest money for your child’s education.
You can also invest as much as you want, without income or contribution limits, in brokerage accounts.
Robinhood allows beginner investors to buy and sell stocks commission-free, even in cryptocurrency. Betterment is an automated robo-investing platform that helps you create a personalized plan based on how much risk you’re willing to take and your investment timeframe.
There are many ways to save money for your children’s higher education before they get anywhere near college age. Just don’t put it off because the sooner you start saving, the more money they’ll have to get started!
Do your research and choose the option that best fits your goals. Be sure to consider the pros and cons of each way to save for college before you pick the one that’s right for you.
A Upromise 529 plan is one of the best options for saving money to cover your child’s future education costs. It offers tax-free growth and withdrawals that can be used at any accredited college or university in the United States.
It’s easy to open an Upromise account and start earning rewards towards your kid’s college savings today!
Be prepared for the possibilities when your child is picking schools! Make sure you’re budgeting each month so that you can save enough money for all those big decisions.
By setting financial goals and sticking to your budget, you can take control of your money and set yourself up to successfully save enough to send your kids to college.