Ways to Save for College
Create a Budget
If you don’t already have a budget, this is a great reason to start one. Estimate about how much you think you need to save for college in total, then divide by the number of months left to get the amount needed to save per month. Writing it down and knowing your goal will keep you accountable to start and stick to your budget. Reevaluating it annually or even quarterly will also provide you time to make adjustments if needed to reach your goal based on changes in income, tax status and more accurate cost estimates. Plus, the sooner you start, the more you’ll be able to save by maximizing compound interest. The chart below shows the power of compounding interest and advantage when you start saving early.
Graphic provided by Balance Financial Resources, 2017
Start a Savings Account
There are many options for college savings products. You can start simple and open a basic savings account, certificate or certain IRA account. If you want to realize the most interest and tax advantages, the best place to start is to consult with a financial advisor. There are many factors to consider like tax implications, income requirements, affects to financial aid and more. SDCCU Investment Services offers a free financial consultation and can provide you options for the investment accounts available that are the best for your specific situation and goals. It is also prudent to consult with a tax advisor for the tax implications as well.
Here is a breakdown on the different savings options.
- Savings Accounts – If you want to keep it simple, a basic savings account can allow you to save as much as you can, contribute anytime, but has limited interest earning potential and is not tax deferred.
- Certificate Accounts – Certificate accounts can help you earn a bit more with a locked term, but contributions are limited due to term and it is not tax deferred.
- Roth IRA – Typically used to save for retirement, Roth IRAs are another vehicle to save as they allow for tax free earnings, contributions are taxed, but you are not taxed on distributions once you hit age 59 ½, and if before, the 10% early withdrawal penalty is waived if funds are used for qualified education expenses.
- Custodial Accounts or UTMA – The adult is the custodian of the account and it has no income, contribution or withdrawal limits but with limited tax deferred growth. Savings does count towards child’s assets and can affect financial aid.
- Coverdell Education Savings (ESA) Account or Educational IRAs– Grows tax free but not tax-deductible and requires income limits to qualify. Contribution amounts are limited, visit irs.gov for current limits. Funds must be used before beneficiary is 30 years old. Withdraws for education are tax-free, with many investment options and it counts towards the parents assets so has a smaller effect on financial aid.
- 529 Plans – If you want to maximize savings, grow savings tax free and don’t meet the income requirements for an ESA, a 529 might be your best option. There are many different options of investment, different advantages in programs by state with contributions being deductible, so talking with a Financial Advisor is encouraged to pick the best option for your situation.
Learn more about financial aid, grants, federal loans and other ways to afford college during our free College Financing 101 webinars every week in September. Check the schedule and register at sdccu.com/fww.
Consult your tax advisor.
The Financial Advisors with SDCCU Investment Services are Registered Representatives of LPL Financial. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. San Diego County Credit Union and SDCCU Investment Services are not registered broker/dealers and are not affiliated with LPL Financial. You are advised to seek advice from your own tax professional.
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