Saving for your children’s education (or future financial needs).
Photo by Sam Truong Dan on Unsplash
The costs of higher education are high. According to the 2018 research by College Board, the bill for tuition and fees at public colleges is roughly $10,000, while the average at private colleges is about $35,000. Given these rising costs, it is not surprising at all that most families need to build a solid savings plan to help their kids eliminate the burden of student loan debt.
Here are a few powerful saving methods to consider.
Open children’s saving accounts
Most banks and similar financial institutions give parents the opportunity to open savings accounts for their kids. Children under the age of 18 cannot sign any legal documents. This means that a parent is usually given joint ownership and can manage their kids’ money until they’re prepared to do so themselves.
When opening children’s savings accounts, parents need to consider several factors. They should choose ones that require no monthly maintenance fees and balance requirements, as well as provide good interest rates, online access to the account, and ATM cards.
Savings accounts also teach children financial responsibility and money management. The role of a parent is not only to help their kids save money for their further education or some other financial needs, but also to help them understand how important it is to plan ahead, stay focused on their priorities, and save for the things they cannot afford right now.
Consider opening a custodial account
One of the simplest and most reliable ways for parents to save for their kids’ future is to open a custodial account. This is basically any form of financial accounts a parent opens and manages for a child until they turn 18 or 21. In other words, a kid doesn’t have access to cash until they reach the age of the majority in their state.
The benefits of custodial accounts are multiple. First, owners of the account can make unlimited contributions to it. Second, as a child grows, the money on the account will rise and mature, too.
There are some disadvantages of custodial accounts, as well. For example, one of them is their impact on financial aid. A kid is considered the owner of the money on the account, so when they apply for financial aid, chances are they will be rejected.
Take advantage of 529 plans
Many parents are still not aware that 529 plans are an immensely powerful savings vehicle. According to the last year’s research, only 44% of parents are saving for their children’s college in 529 plans.
529 plans are college savings options that provide future students with many tax and financial aid benefits. They can be used to cover the costs of studying at almost any qualified college in the country.
There are two basic types of 529 plans.
The first one is general college savings plans that let parents put money aside and use that money at any school, including private ones. Some states even encourage future students’ parents to use 529 plans by providing tax deductions for their contributions. Moreover, the withdrawals related to costs of education are not included in the federal income tax.
The second type of plans is prepaid tuition that allows parents to cover some or all expenses of in-state public colleges ahead of time. Alternatively, there are specific plans dedicated to the parents of students going to out-of-state schools and private colleges.
Invest in life insurance
When it comes to investing in the kids’ future, nothing beats their health and safety. This is why many parents decide to invest their surplus money into the right children insurance plan, such as whole life insurance, prenatal insurance, short-term health insurance, or endowment insurance plans. The idea behind these insurance types is simple – to protect families against unforeseen circumstances and help them cover their costs easily.
Many parents decide to invest in a life insurance policy to protect their kids in case they die early. However, most of them don’t know that their life insurance plans can also serve as a reliable savings method.
Namely, for each dollar an insurance user pays in premiums, a certain amount is transferred to a user’s cash-value account. Therefore, if the policy has gathered enough cash value over time, a user can borrow against the cash value and use that money to finance their kids’ college.
Leverage a Roth IRA
Even though we know it as a powerful retirement-savings vehicle, Roth IRA can also help parents pay at least a part of their kids’ college costs. The real benefits of the Roth IRA shine when a user turns 59 ½. In this case, all of their withdrawals, both their earnings and contributions, can be withdrawn for free.
Simply put, 100% of a parent’s withdrawals from the account can be used to cover the expenses of education. If a parent hasn’t turned 59 ½ yet, they can also use the money for college costs without an early withdrawal penalty.
When saving money for children’s future education, parents need to think rationally. There is no uniform plan they could apply and protect their savings in the long run. On the contrary, they need to consider their own financial needs and limits and adapt their savings strategy accordingly.
How do you save money for your kids’ future financial needs?
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