Are you a new parent? If so, congratulations! There are so many things to plan for when it comes to your child’s future. It can be easy to get caught in the “right now” trap, like home remodels, professional photos, wardrobe, Disney vacations and a new SUV, but the future is right around the corner. Before dumping cash into these luxuries, consider putting money away for college first. Here are some of the best savings plans you can open right now.
529 Education Savings Plan
With a 529 plan, you can invest after-tax funds to pay for your child’s educational expenses. The money you invest today goes into stocks and bonds and other investment accounts that are expected to turn a profit.
You can start this savings plan as soon as your child is born. There are some fees you may be responsible for, such as enrollment and ongoing management costs. But this is a great plan for young parents because it offers good tax benefits. For example, fund withdrawals aren’t subject to federal income tax as long as they go to qualified expenses. The earlier you invest, the more potential for savings growth to keep up with future college tuition costs.
High-Yield Savings Account
If you wish to keep things simple, consider opening a high-yield savings account. As a young parent with kids who maybe haven’t even started school yet, opening a savings account now can be good for both college and overall savings. This also offers a good storage place for funds to be used for future emergencies. Most high-yield accounts pay almost 2.5% annual percentage yield, so expect a good return 10 to 20 years from now.
Coverdell Education Savings Account
This type of account is great for young families. The Coverdell Education Savings Account (ESA) lets you make monetary deposits with after-tax dollars. In addition, savings grow tax-free. Not only can the tax-free funds be used for college tuition and books, but it can also be withdrawn without penalties to pay for K-12 expenses such as tutoring and uniforms. There is a contribution limit of $2,000 per beneficiary per year.
The Motley Fool suggests that if you make a $2,000 a year contribution for 18 years, it equals out to 36,000. If your investment return generates a 7% return on average, it could grow to over $72,000 by the time they start college or turn 18.
UGMA Account
As a young parent, now is the time to stash money away for your child’s future. One way is to establish a trust is through a Uniform Gift to Minors Act (UGMA) account. This allows your minor child to own securities and assets that can be used not only for college but for an inheritance as well. The only drawback is that it has an impact on FAFSA eligibility, unlike the 529 plan. This is something to consider when opting to diversify your resources for saving for college.
It’s never too early to start saving for your child’s college and future expenses. The good news is that most plans don’t limit your ability to apply for others, so you can combine approaches to increase the savings. No one knows what the future holds, but you can have peace of mind knowing you have a nice nest egg for your child.
~Here’s to Your Success!
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