As September and October roll around each year, parents begin to think about starting savings plans or options to begin to prepare to pay for college tuition for their children.
For some families, the biggest issue is trying to find the funds to start preparing for college. There are many different options to consider, and if children are young, even very modest investments can have substantial results by the time they reach college age.
The following are the most common options for planning to send one or more children to college. Remember, getting started early is always the best option, but it is never too late to begin putting money aside.
- 529 plans – These are set up by the state in which you reside, and they provide tax-deferred savings opportunities. There are many different immediate and future benefits to 529 plans, but there are also a range of plan options to consider, including how they are structured and if they are prepaid tuition or savings programs.
- IRAs – A Roth IRA offers the option to set aside a set amount of your income, after taxes, to grow in a tax-free account provided you are 59½ years of age when withdrawn. A traditional IRA can also be of benefit and will be tax-deferred, but taxes will be paid when the amount is withdrawn.
- Savings Accounts – Traditional savings accounts, while not offering significant interest, provide the most flexibility. There is no set maximum contribution, as with different IRAs, but there are also the obvious drawbacks of lower interest and greater accessibility to the account to pay for other things.
- Investments or Real Estate – While not traditional, many investments, including real estate, can be used to fund a college education and may be a good option for some families. There is more of a risk factor involved with investments, but many different options provide different risk levels.
- Life Insurance Policies – While this is always difficult to consider, having enough life insurance to pay for a child’s education in the case of death of a parent is a low-cost option, especially for younger parents.
Finding the right combination of savings options to suit your budget, the age of your children and your comfort with risk starts with talking to your financial planner.