Your new bundle of joy has just arrived. The first thing in your mind is the price of diapers. Then you have to deal with the constant sleep interruptions every night to attend to your child. The last thing on your mind is their college education.

Fidelity’s study seems to agree with this. About 62 percent of parents hope to save for their children’s college education. However, the same number is only on course to pay a third of the expenses.

College education costs are on the rise every year, so saving as early as possible is your best bet. Many parents don’t even know where to start, but in this article, you’ll get a complete guide on the options available. You can decide the best for you later on.

  1.    UTMA/UGMA Accounts

The UTMA and UGMA are both custodial accounts. This means you hold partial ownership on behalf of your child.

You will maintain custody of this account, including assets associated with the account until your child reaches 18. The age might vary from state to state, so be sure to confirm what the legal age is in your state.

The benefit of this account is that since it’s considered the child’s account, a certain amount of income from investments will not be taxed, while the other portion is taxed using the child’s rate rather than that of the parent.

Potential Drawbacks

One of the drawbacks is the partial taxation of income using the child’s rate. It’s an advantage, but also a big drawback. Once the required amount is taxed with the child’s rate, the remainder is subject to the parent’s rate. This is not the case in Coverdell ESA or a 529 plan, both of which are explained later.

Another drawback is the fact that you only hold partial custody of the account. Once your child hits the legal age, you’ll be required to hand over ownership of the account to your child. The reason this is a drawback is that you cannot control how your child spends the money in this account. They can decide to waste the money or use it for its intended purpose.

  1.    529 Plan

Five years ago, only 15% of Americans were using the 529 plan. Now, though, this figure stands at 33%, an 18% rise. This is according to a report by Clark.com. This savings plan ranks among the best plans available to save for your child’s education.

This plan is split into two types:

In the 529Savings Account, you can make contributions after-tax on behalf of a certain beneficiary of your choice and not necessarily a child. The interest you make in this account is tax-free, meaning you can also withdraw the funds tax-free.

The Advantages

The obvious advantage is the fact that the savings in the plan will grow tax-deferred, and you can make withdrawals without the fear of taxes. This allows parents to take full advantage of the plan.

Another advantage is the indefinite custody of the account that the parent holds. It’s possible that you can go ahead and shut down the plan and withdraw the money, but you’ll face penalties.

The Disadvantages

A 529 has a few drawbacks, and it’s important to understand them. The most glaring of all drawbacks is that this plan is considered a college savings account. This means any contributions geared towards anything but college will not qualify as a legitimate expense.

The other drawback is that investing in 529 plans only involves about 10 to 30 mutual funds. This is a limitation compared to other accounts which allow for all types of funds.

Roth IRAs

A Roth IRA is for retirement, that’s true. This question is what bothers a number of parents: Should I use a Roth IRA to save for my child’s education?

Well, you can. Parents and guardians are taking advantage of this plan because it allows them to kill two birds with one stone. If you’ve fallen back on retirement contributions, but you’re financially stable, then you can use the Roth IRA to save for college expenses.

The Advantages

  •    You can withdraw the funds penalty and tax-free: Your earnings will benefit from tax-free growth only if your account has been active for the last 5 years or more and distributions don’t begin before age 59 ½. Since all contributions to the plan were made using the after-tax money, you can withdraw the funds at any time tax and penalty free.
  •    Tax-deferred Growth: Again, since all contributions made to Roth IRAs originate from after-tax earnings, they will grow tax-deferred if you meet the terms. That is holding the account for at least 5 years and attaining the age of 59 ½. This means you can withdraw funds for college expenses at any time and the remainder will continue to grow while achieving your retirement goals.
  •    Roth IRAs provide more flexibility in terms of investments; 529 plans have a limited number of investments you can choose from. On the contrary. Roth IRAs are open to multiple investments including CDs, REITs, ETFs, mutual funds, bonds, stocks etc.

The Drawbacks

Contributions are capped at $5,500 and $6,500 for people above 50. When compared to other college education savings plans, the Roth IRA offers a lower limit in terms. On top of that, your child could be ineligible for financial aid.

Open Your Own Savings Account

When it comes to long-term commitments such as college education for your child, it’s important to start as early as possible. Also, when you start saving, make sure you maintain a consistent pattern in order to achieve your goals.

To do this, you can open a savings account with a banking or credit union. The best part about these accounts is having full control of the assets and contributions associated with the account and having access to online banking such as online banking in Hoquiam, WA. Also, you don’t need to always take extra credit help from lender if you save enough. But sometimes emergencies occur, and it is unavoidable to borrow money. Take help from JustRightLoans which can help find lower rates, so it will less impact saving account.   On the other hand, the only disadvantage with such accounts is you’ll have to deal with the taxes imposed on the contributions every year.

Other benefits include:

  •    You can contribute as much as possible. There are no limits.
  •    Regardless of your earnings, you can still make contributions.
  •    You’ll have full control of the account including when to make withdrawals.

Coverdell Education Savings Account (ESA)

Coverdell Education Savings Account was previously known as an Education IRA and it was set up by the federal government to help families raise funds to pay for their children’s education. Keep in mind that this account is tax-deferred as long as you use the money solely on education.

You can set up an ESA at the brokerage or other financial institutions. Further, the contributions made towards this account cannot be deducted. Also, apart from individual contributions, corporations can also contribute to an ESA without limitations on modified gross income.

After the beneficiary hits 30, funds that remain in the ESA will be disbursed. However, if the beneficiary has special needs, he or she will be exempt from this rule.

Conclusion

You don’t want your child getting into college without any funds to see them through. Therefore, with these tips, you can choose the plan that best suits you and starts saving.