Saving for College
As a parent you want nothing more than for your children to be successful, and an early step on that path is getting a college education. A study from a few years ago found that folks who have a bachelor’s degree earn 84% more money in their lifetime than their high school diploma holding peers. Those who have graduated high school tend to earn $1.3 million over their lifetime, college graduates earn about $2.3 million, and those who keep going and get their doctorate earn about $3.3 million. That said, college is incredibly expensive, and most student loan payment plans expect folks to pay them off in 10 years. Unfortunately, it usually ends up being about 20 years. However, you as a parent can make a big difference! By starting to save for your kid’s college fund early and intensively, you can help to alleviate this burden, and improve their chances of remaining on strong financial footing throughout their lives! Keep on reading for our tips to help you start saving!
- Look into a 529 plan: One of the most common ways to save for college is called a 529 plan, and gets its name from Section 529 of the Internal Revenue Code. Often times these plans are sponsored by the state, or particular college institutions. Within a 529 plan, there are two different categories: prepaid tuition plans, and college savings plans. Prepaid tuition plans allow investors (parents, in your case) to pay for college credits in advance, within your state. The big draw here is that you are able to lock in a current day rate for the future, and avoid any tuition hikes. College savings plans don’t allow you to secure a current day rate, but also don’t require you to select the state your child will go to college in. This can be a big advantage, as many high school students aren’t sure where they want to attend college. Overall 529 plans area great option to consider because they are tax-free, which is a huge financial advantage.
- Consider your retirement: Many times parents – though well intentioned – may jump the gun in terms of saving for college. It is important to consider where you stand as far as retirement income before starting a college fund. The biggest reason is that paying for college can be achieved in a number of ways. However, payment for retirement cannot. For example, your child could apply for a number of scholarships whether they be academic or sports related, while as a retiree, you are required to keep paying your bills regardless. Moreover, it can be very difficult for a recent college graduate or someone just beginning their career to have to take care of another person financially. Before setting up a 529 plan, ensure that you’re putting in at least the percentage that your employer will match you to a 401(k). Then, consider setting up a Roth, or Traditional IRA. Keep in mind, you will have to pay taxes on withdraws at the time with a Traditional IRA account. On the flip side, with a Roth IRA, you can pay taxes at the time of deposit, in order to avoid having to pay taxes when you need the money most – when you’re retired.
- Don’t take money from your 401(k): This tip is more of a cautious, “What not to do.” If you have been socking away money for retirement in a 401(k), first and foremost, good job! The key is to let your money sit in that account, and to never touch it. While it may be tempting to tap into it and remove money, or to take out a loan against your 401(k), it should never top this list of reserve funds. There are a couple of reasons to not tamper with your 401(k) money. First and foremost, there are almost always fees associated with doing so. For example, there are often tax-related costs incurred with drawing on the account, as it counts toward your revenue stream for the year. Instead of using that money for retirement, you end up handing it directly over to the government – at little no advantage for yourself. Once you turn 59 ½, you are able to make withdrawals from your 401(k) without having to worry about a federal tax penalty, which means more money directly into your pocket.