The thought of saving big sums of money may seem daunting for many people, especially if they plan to attend college. Indeed, it’s no secret tuition and other college-related expenses, such as room and board, come with a hefty price tag.
However, you’ll be relieved to find out there are numerous ways to save for college expenses, starting right now. Consider these plans for building your college nest egg:
1. Mutual Funds
Mutual funds are a popular choice for saving money — and for good reason. That’s because your money is diversified in multiple areas, where its growth is based on the performance of the companies you choose. And if you’re not seeing the kind of growth you expect or desire, you have the freedom to reallocate your funds to different securities.
Speak with a financial advisor or investment specialist to enroll in one or several mutual funds. From there, you can decide where you want to pool your money. You’ll have the choice of several different securities that also includes stocks and bonds. Additionally, future earnings will come from capital gains, dividends, and/or bond coupon payments.
Two advantages of investing in mutual funds include the following:
Funds that you save from a mutual fund can be used for anything (e.g., cars, airline tickets, computers, etc.)
There’s no limit on how much you can invest. In fact, there are more than 10,000 mutual funds available, with a wide variety of investment options.
2. 529 Savings Plans
A 529 savings plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Earnings and withdrawals are completely tax-free, as long as the money is used for college-related expenses. There are two types of 529 savings plans from which to choose:
College savings plans
Prepaid tuition plans
Additionally, you can set up a 529 savings plan and declare a beneficiary who will receive the funds for college-related expenses at a designated time. If your beneficiary later decides not to pursue a college education, you have the option of changing the beneficiary or withdrawing the funds for your own use. However, using the funds for non-educational expenses may result in a penalty. Consult your tax advisor for additional information.
Some advantages of a 529 savings plan include the following:
You can make annual withdrawals of up to $10,000 for K-12 tuition costs to avoid federal income and capital gains taxes.
529 accounts owned by dependent students are considered parent assets. Furthermore, nothing has to be reported on the student’s FAFSA when the funds are withdrawn to pay for college.
You can make tax-free withdrawals to pay for qualified educational expenses.
Saving for college with a 529 savings plan is easy and manageable for almost anyone. In fact, most states don’t charge initial setup fees, and the plan can be established in some states with a small contribution as low as $25.
3. Coverdell Education Savings Account
Similar to a 529 savings plan, the Coverdell Education Savings Account also grows tax-free in interest earnings and allows tax-free withdrawals for qualified educational expenses. Some other advantages of the Coverdell Education Savings Account include the following:
You can make annual tax-free withdrawals of up to $10,000 for K-12 expenses and qualified higher education expenses.
You’ll receive a variety of investment options that include the ability to self-direct your investments.
The value of a Coverdell ESA is considered a parent asset on the FAFSA, regardless of who owns it.
Decide Which Plan to Choose and Catch the Early Bird Savings
Deciding which types of savings plans to use for post-secondary education purposes requires some planning and know-how. However, catching the early bird means obvious future benefits. Consider if you’ll be using your savings plan exclusively for college expenses or for other purposes. From there, consult your financial advisor to start building your college nest egg.
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