Becoming a parent for the first time is so exciting as you welcome your new bundle of joy! As you all adjust over the first few weeks and months of becoming a family, you do all that you can to take care of your little one. In addition to the everyday care of your child, you will also want to protect his or her future. We will discuss 3 important steps you should take when planning for your baby. The first one is to open a college fund.
1. Open a College Fund
While it’s difficult to know exactly what tuition fees will be years from now and you decide to forget about saving for college altogether, keep in mind that college is still a good investment for your child’s future. Most students attend affordable colleges and while financial aid is available for most, having a plan in place will help cut the cost of tuition and expenses. It’s likely that as college costs rise, so will your income.
The Best Ways to Save for College:
- 529 College Savings Plans – investment accounts to set aside money for your child’s education, tax-free. Any withdrawals are not taxed, as long as it’s used for higher education. The best part: You can open an account with as little as $25, and can use the money in a 529 plan at any accredited college or university in the country. For more information, visit Introduction to 529 Plans.
- Prepaid Tuition Plans – investment accounts that allow you to pay for your child’s future college tuition (or a portion of it) at today’s prices. This allows you to pay for a complete four-year degree that your child won’t use for another 18 years, or, you can prepay a portion of your child’s college expenses.
- Coverdell Education Savings Accounts (ESA)- acts like an IRA (for education purposes), and you can contribute up to $2,000 a year with post-tax dollars. The money grows tax-free, and neither the contribution nor the interest is taxed when you make a withdrawal, as long as you use it for education purposes. For more information, visit Coverdell Education Savings Accounts (CESA).
- Custodial Accounts
A custodial account is a savings account in your child’s name that you control until he/she reaches legal age. You decide how much to put into the account, how the money is invested, how earnings are reinvested, and when to take money out to spend on your child’s behalf. For more information, visit Custodial Accounts.
- IRA and Roth IRA Accounts
A traditional IRA and a Roth IRA are investment accounts that allow you to save money for retirement or college while avoiding significant taxes.