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Every parent wants what’s best for their kids. A big part of that? Education. And as every parent knows, saving for that education is a task unto itself.
The cost of a four-year degree at a public in-state college is expected to be more than $43,000 a year. For a private, for-profit school, that number is expected to be more than $93,000 a year.
So, if you’re in a position to do it, saving for your children’s education can be great for their future. There are good choices no matter what your income is — here’s a breakdown from Ellevest of the most common ones.
1. 529 education savings plan
This one’s first on the list for a reason: 529 education savings plans (commonly called 529 college savings plans) have great tax benefits, and they’re a good option whether you’re able to contribute a lot or a little. That’s because there’s no income or annual contribution limit.
A 529 college savings plan is a tax-advantaged investment account that can be used to save for education-related expenses for a designated beneficiary (aka that kid you love so much).
The money you put in a 529 grows tax-free, and withdrawals are also tax-free if they’re used for qualified education expenses. This includes the cost of college itself — including required things like tuition, room and board, books, and computers — and, in many states, up to $10,000 a year for K–12 tuition. Plus, depending on where you live, you might get state tax benefits on contributions, too.
2. 529 prepaid tuition plan
A 529 prepaid tuition plan lets you pre-pay for blocks of tuition at a specific school today. That means you’re locking in today’s prices at that school. This usually includes tuition and fees only — not room and board, books, etc.
These are available in a handful of states, and your child would have to attend a public school in that state. You often have to actually live in that state, too.
For private schools, there’s also an independent plan called the Private College 529. It works much the same way but allows your kid to choose among almost 300 private schools around the US instead.
3. Coverdell Education Savings Account
Coverdell Education Savings Accounts (ESAs) are pretty similar to 529s. The big difference used to be that you could use them for K–12 expenses, but now you can use a 529 for K–12 tuition, too.
But there are a few other differences as well. For example, you have more flexibility with what you can withdraw money for during elementary and high school — things like those uniforms that are impossible to keep clean, and tutoring so they can smash the SAT (you know they will) are usually fair game here. Also, you often have more, and maybe cheaper, investment options with a Coverdell ESA. Differences that aren’t so fun: There’s a $2,000 annual contribution limit per child, and they have to be under 18 when you put money in.
4. Roth IRA
Roth IRAs are retirement accounts. But you can withdraw your contributions penalty- and tax-free from a Roth IRA at any time, and they let you withdraw your earnings early without penalty for a handful of reasons — including education expenses for you, your spouse, or your kids or grandkids (but you’ll still owe taxes).
So the cool thing about going this route is that it gives you options: You can use the money in a Roth IRA for your retirement if you need it, or you can use it for qualified education expenses (the same ones you can use 529s for) if that works for your long-term goals.
5. Taxable investment account
If you want to invest for future education costs but you’d rather be free to spend it on whatever your kid needs, a regular taxable investment account might work for you.
You won’t get any special tax benefits, but you’ll have the most flexibility — both in how you spend the money and in the investments you can choose (meaning you have more of a say in controlling your fees). Also, there wouldn’t be any penalty if you wanted to use the money for something other than education, if life should happen that way.
6. UGMA or UTMA account
If your income is too high for a Coverdell ESA or Roth IRA but you’re looking for more flexibility or higher contribution limits, then a custodial Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account might work for your kid instead.
You’ll choose a custodian (probably you) and name a beneficiary (your child). When your child reaches the “age of majority” in your state — often 18 or 21 — the assets will transfer to them, and they can spend the money however they want.
The difference here is that this account belongs to your child, not to you. Their withdrawals will be subject to the “kiddie tax” rates, which gives them a little bit of a break.
7. 2503 (c) trust
Also called a minor’s trust, a 2503(c) trust works a lot like a UGMA/UTMA account when you use it for education expenses. The downsides are that they’re harder to set up (an attorney is a must), the taxes might be higher and more complicated, and these assets would factor heavily into financial aid decisions. But the upsides are that you might be able to write the terms so that your child doesn’t automatically get control of the money once they turn 18 or 21 (you just have to give them a temporary window of opportunity to withdraw if they want). Also, the money is usually protected from your child’s creditors.
Unless the tuition bill is due now, it’s never “too late” to start investing for education. Every little bit can help, and every day your money is invested is another opportunity for it to grow and make an impact on their future financial security.
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