SAVE FOR COLLEGE
The first thing you need to do is determine how much money you will need.
A 529 savings plan: This state-sponsored plan allows your earnings to grow tax-free and doesn’t make you pay taxes when you withdraw the money. It can be used for tuition, fees, room, board, books and supplies and other equipment. You can invest in any state plan, and the beneficiary can use the money to attend any college or university in the country. You can also use the money in a 529 plan to pay for up to $10,000 a year in tuition expenses at elementary or secondary private or parochial schools.
However, you’ll be hit with a 10% penalty and will have to pay taxes if you use the money for non-qualified expenses. If your child doesn’t use it, you can change the beneficiary to a sibling, another relative, friend or even yourself.
Prepaid tuition plan: You can lock in your kid’s future tuition at today’s rates by investing in a 529 prepaid plan.
Withdrawals are also tax-free when used for college expenses, but generally only cover tuition and fees. These plans are more conservative investments. You’ll likely wind up with more money if you invested in a 529 plan.
Roth IRA: As long as you have had it for five years and are at least 59½, you can start withdrawing tax-free funds from your Roth IRA.
Save in your own name: You may opt to put some of your child’s college savings into your own personal investments, since dividends and capital gains are taxed at 0%, 15% or 20% for 2019, depending on your income.
Look for a tax-efficient investment, such as a stock index fund or exchange-traded fund. When you sell the investment, you can gift some of the money to take advantage of the lower taxes on gains. However, taxable accounts don’t come close to the compounded returns of a 529 plan.
Check out savingforcollege.com for comprehensive coverage of the various college savings options. You can compare various plans, including contribution limits, tax treatment and impact on financial aid.
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