The significant cost of higher education is leaving many parents scrambling to begin savings accounts for their children. After welcoming your baby into the world, take the time to consider the best way to start saving for his or her future.
Invest in a 529 college plan
One of the most popular methods for saving for college is starting a 529 plan. This operates like an individual retirement account or 401(k) plan. It is a tax-free option that allows you as a parent to stash away and invest money for your child.
529 plans are only allowed for educational use and there will be a penalty for withdrawals outside of educational purposes. The max amount you can contribute to this account is determined by your state and you as the account holder will manage the funds in the account.
If your child does not want to attend college in the future, the owner of the account can change who the beneficiary is to ensure the funds are used for educational purposes.
Consider prepaying tuition
Prepaying tuition allows you to pay for your newborn’s future college costs at the price it is now. It won’t increase if the costs rise. In addition, the money is also guaranteed by the states in which you buy. Also, prepaid tuition plans offer parents tax incentives such as a tax break or deduction.
Prepaid tuition is a more secure option than a 529 plan because it does not depend so heavily on the condition of the market. After the financial crisis, many parents helplessly watched 529 plans dive in conjunction with the stock market. Prepaid tuition provides security because it is not impacted by the market or the rising cost of education.
Open a Custodial Account
A custodial account is opened by an adult for a child. It is not as restricting as the first two options because the child can use the money in this account for anything. You are able to contribute an unlimited amount of money to this account, but once the money is in there, only the child can take the money out when they reach adulthood.
These accounts are also useful if you are not the parent of the newborn, but you want to contribute money towards the future of the baby. They are not restricted to a parent creating the account for their child.
Starting to save early for your newborn’s future can help allow you to put some of the stress of paying for college to the side and spend time with your new little baby. Take the time to do your research and figure out the best option for you and your new family!
Consult your tax advisor.