If you’re a new parent, you’re likely lost in the throes of sleepless nights and learning about this new beautiful creature in your life. Right now, you’d rather cherish the present than think about future milestones like their first loose tooth, learning to ride a bike, or getting their driver’s license. And certainly, staring at that sweet baby face is far preferable to thinking about paying their college tuition.
But, it’ll be worth it to interrupt that gaze for a second and take a look at these three routes for saving for your child’s education. I promise to keep this short so you can go back to peering in those beautiful eyes.
The 529 savings plan is geared specifically toward saving for college. There are a variety of 529 plans with varying fees, but the key benefit is they typically have tax advantages, such as earnings that aren’t subject to federal taxes as long as they are used on qualified expenses. Qualified expenses include tuition, room and board, books, supplies, computers, and fees for someone who attends school as at least a half time student. After you set up a 529 plan in your child’s name, family members can contribute. Just think of how much more quickly funds will add up when you funnel all those birthday and holiday checks into one spot.
Coverdell Education Savings Account
While 529s are more popular that the little-heard-of Coverdell, this account does offer some advantages. True, Coverdell ESAs are more limited in the amount you can tuck away: the annual savings cap per beneficiary is $2000, while the 529s have an annual contribution cap of $14,000. The upside is that your earnings can be withdrawn tax-free for a broader array of education expenses. While 529s limit qualified expenses to college, the Coverdell ESA can also be applied to elementary and secondary school expenses.
Yes, Roth IRAs are technically retirement accounts that are generally not taxed. But your contributions are shielded from financial aid calculations and you can withdraw them at anytime and use them for college expenses.
These three options can you get you on a path to building that nest egg for college. We all know that time passes faster than we think, so it’s important to start saving as soon as possible.
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