Whether you’re rocking your sweet two-month-old baby to sleep or teaching your three-year-old to say please and thank you, savor it because they’ll be packing the car and heading to college in the blink of an eye. With the cost of a college education on the rise, your goal is to be thinking about how you’ll be spending their holidays, not how to pay for tuition.
With an early start and small, continuous investments, you’ll be better prepared to tackle the tuition costs. Here are some options that can help you get started:
529 College Savings Plan
A 529 College Savings Plan is a state-sponsored, tax-advantaged, education savings plan. It offers features and benefits that encourage early investing and helps families create a stronger financial strategy for continued education. Any citizen or taxpayer can open an account, and almost anyone can contribute funds—think birthday, graduation, and holiday gifts that will grow over time!
A 529 Plan also provides valuable tax benefits. Most every state offers at least one plan, and the majority of those states also offer full or partial state income tax deductions, so everyone wins!
Prepaid Tuition Plans
A prepaid tuition plan allows you to pay for tuition credits in advance and at a preset price. With the rising cost of tuition, the state generally assumes the market risk in exchange for your early investment. There are a few caveats, though. Not all states offer these plans and, if they do, you’ll need to be certain that your child will attend an in-state public school.
Prepaid tuition plans offer the same tax benefits as 529 Plans, and you’re able to change beneficiaries, or possibly be reimbursed for all or a portion of your investment if your child opts for another path.
Before you invest, be sure to get the full details on these plans since they can vary wildly from state to state.
UGMA and UTMA Accounts
The Uniform Gift To Minors Act (UGMA) or Uniform Transfer To Minors Act (UTMA) accounts enable parents to establish an account and name the minor child and soon-to-be student as the beneficiary. These accounts offer significant tax benefits. Under the Federal Gift Tax treatment, the first $1,050 in unearned income is tax-exempt. For certain children under 24 years of age, unearned income over $2,100 is taxed at the estate and trust rates.
When the child reaches the age of majority, 18 or 21, depending on the state, he or she can withdraw the funds to pay for college, or any other purpose. If he or she doesn’t decide to earn a degree, there’s no need to transfer it to another beneficiary, which is a common concern with 529 and prepaid tuition plans.
Permanent Life Insurance
One frequently overlooked option for college savings is an Indexed Universal Life Insurance policy (IUL). Not only can the cash value accumulation be withdrawn to fund your child’s education, it also provides a death benefit, which offers your family financial security in the event of your untimely death.
Depending upon the policy, the cash value can be invested in a fixed fund that offers access to higher credited interest rates and the protection of a guaranteed minimum, or in several different equity indexes. IULs do place a cap on your growth, but they also provide valuable principle protection that offers you more financial security for the future.
Whichever option you choose, start early and save on a regular basis. Be sure to meet with your financial professional to discuss the most appropriate options that can help you reach your college funding goals.