College Funds

The college funds required to attend post-secondary schools can seem like a tremendous financial hurdle at first. Fortunately, there are ways to plan ahead so that you or your children will be able to attend college without having to worry about an overwhelming financial burden. College funds offer parents and future college students a way to save for post-secondary education. There are a variety of ways to start college funds.

Section 529 College Savings Plans

Most states offer section 529 savings plans, which were initiated in 1996 and are named after the Internal Revenue Code that they fall under. Even if the state you reside in does not offer a section 529 plan, you can still take advantage of a plan from another state. In fact, it is possible to invest in a number of section 529 savings plans if desired. Keep in mind that investors may receive better tax benefits for plans that are offered by their own state of residence. There are also 529 plans that are operated by educational institutions. It is important to compare plans to find the one that will offer you the most financial benefits over time.

There are two primary types of 529 college funds including:

College savings plans provide earnings that are tax deferred as long as the funds are used to pay for attendance at a qualifying educational institution. Regulations will differ from state to state. For instance, the amount that you are allowed to contribute to the fund will depend on which state is offering the 529 plan. In order to determine up-to-date contribution limits and other important details, talk with a tax expert and refer to the IRS website.

Pre-paid tuition plans are offered by select state universities. Perhaps the greatest advantage to a pre-paid tuition plan is that you’ll be able to pay tuition ahead of time and will therefore lock in the current price of tuition. With college tuition increasing dramatically every year, paying the current tuition rate is likely to save you a considerable amount of money. With a pre-paid tuition plan, you may have the option of paying the full amount of tuition in one sum prior to attending the college, or you will be have the option of paying in installments over time. The downside to this plan is that you will have to choose the school ahead of time, which may cause problems down the line if you or your child decides on another college after you’ve already committed to the plan.

Roth IRA College Funds

Just as individuals can start tax-free retirement accounts, similar accounts can be found that are specifically designed for college funds. Funds can be withdrawn tax-free from Roth IRAs. If started early enough, Roth IRAs can provide an excellent method of saving for college and earning interest in the meantime.

The start-up payment for a Roth IRA should be considered since it is considerably higher than most 529 college savings plans. Most companies offering college Roth IRAs require a minimum payment of about $2,500 each year, which is equal to about $200 each month. In comparison, most 529 plans will allow you to pay as little as $15 per month.

Another aspect of Roth IRAs that is important to consider is that you will need to pay taxes on the interest you have made on the account once you withdraw funds for college tuition. In contrast, 529 plans do not require you to pay on earnings that are spent on college tuition.

Again, it is important to refer to the IRS website to get current details about Roth IRAs. For instance, contribution limits are subject to change from year to year.

Things to Consider Before Starting College Funds

To get the most out of your savings plan, it is a good idea to make an outline of your financial goals. A few things to consider include:

Estimate the year that your child is most likely to attend college.

Determine what type of college you think you’ll be able to afford. For instance, private college will cost significantly more than public schools.

Set a goal for how much you’d like to have saved by a specific year.

Determine the minimum amount you will need to contribute to the plan each month in order to meet your long-term financial goals.

While you can certainly ask friends and family to contribute to whichever college fund you choose on birthdays and/or holidays, do not include these “extra” contributions in your monthly or yearly outline since the amount of these gifts will vary. By starting early and devising a solid college fund plan, you can rest assured that college tuition will be taken care of by the time your child is ready to attend post-secondary school.