The cost of a college education is rising, and with it, so is the talk of paying for education. It’s not hard to see why. With everything included – tuition, books, housing, and everything else – the total can run well into the six-figure range.
You have the option of things like scholarships, grants, and loans to make paying a little easier, but some people like the peace of mind that comes with paying in advance. So with this post, we will look at different types of savings plans that will help you fund a college education.
Going All-In with Tuition Stabilization
For those with the financial means, there’s the option of paying the school upfront. In some cases, a school will let you pay the first-year rate if you pay the sum in total for all four years. This will let you save money in the long run and is a smart choice for anyone who can afford it.
The 529 Plan
The 529 plan is a tax-deferred savings account offered by your state. The way the plan is run varies by state, but they are all alike in that you can accrue a large number of tax-deferred funds for educational purposes. The amounts tend to be larger than many other investment vehicles that are used for college education.
Usually, you can contribute up to $11,000 per year, and the parents control the distribution of the fund. These plans are popular because, as stated, they are tax-deferred, but they also incur no penalties as long as the money is used for qualified educational expenses. The money can also be transferred to someone else if the original beneficiary does not need it.
The Coverdell IRA
One other way to fund a college education is to use this type of plan, which lets you save up to $2000 and use the money for education-related expenses.
The Custodian Account
This is an account you can use if you want to gift funds to the child for their education, as such funds will usually have lower tax rates. You contribute the money and you have control of it as well.
The laws followed, in this case, are the Uniform Gift to Minors Act or the Uniform Transfers to Minors Act. Be aware that, under these laws, the beneficiary will be given possession of the money starting at age 18. At that point, they can use it for whatever they wish, college or otherwise.
This type of account can be used to take advantage of the annual gift tax exclusion. The terms for this state “a gift to an individual under 21 will not be considered a gift of a future interest as long as the property and its income is payable to the child at 21.”
Concerning education costs, the two trusts most people use are the current income trust and the Crummey trust. In the first, income has to go to the beneficiary, so the trustee has no rights of control. In the latter, gifts can be made for the child’s benefit without tax implications of liability to the trustee’s estate. In this scenario, the trust itself may have to pay some taxes.
The Retirement Plans
Some retirement plans allow money to be withdrawn for qualified educational expenses without the usual penalty for early withdrawal. If that’s the case with your plan, you will find that information in the plan’s details.
These are the basics of funding a college education, and they are all at your disposal. So make sure to look closely at each one and see which one fits your situation the best.