It takes planning and concentrated savings to help their kids afford college and avoid a mountain of student loan debt for most parents. If you have already heard about 529 plans, you may want to explore other alternatives before opening an account.
While a 529 plan is a great way to save for your child’s educational expenses, there might be other plans that check off more of the boxes you need. From Roth IRAs to UGMA and UTMA accounts, there’s an entire world of saving for your child’s future college expenses out there. You need to explore before making the call. Here’s your guide to everything you need to consider.
How a 529 Plan Works
A 529 plan is a tax-advantaged saving account offered by the state you currently live in. Not all states have the same plan, so it’s essential that you check the details in your state. The funds in the account can be used for higher education, K-12 tuition, and an apprenticeship program, which provides you with some flexibility.
Anyone can create a 529 plan for your child, and there are two major types of 529 plans, the savings account and the prepaid tuition option. You don’t pay taxes on the money you make with the investments until the funds are used and then only to the state if your state requires it. The funds are typically invested in a mutual fund.
It’s also possible that the financial aid office at your child’s college might figure the amount in the account into the worksheet for federal aid. However, there’s usually only a minimal difference in offered assistance.
Alternatives to a 529 Plan
The 529 plan isn’t the only game in town. There are some alternatives to a 529 plan.
Prepaid Tuition Plans
The prepaid tuition plan is one of the two types of 529 plans; however, it seems to get past over for consideration. The individual state runs this plan, and not all states offer it. The rules may change by each state as well. You don’t pay taxes on growth in these accounts and don’t pay federal tax if the money is used for educational purposes. You may pay a gift tax if the yearly contribution amount exceeds $15,000.
You are saving money to send your child to a specific university. What if your child chooses a different college? No worries! In most cases, the funds can transfer to the new college, or you can secure a refund of the money, contributions, and earned income.
UNest: An App to Save for Your Children’s Future
With UNest, you can open a tax-advantaged investment account for your children and manage it from your phone. The app is available for Android and Apple phones. You have your choice of plans, one for a single child and the other for a family with up to five children.
Your friends and relatives can invest in the account as well. Earn cash back with select companies that you probably already shop with every week. The cashback moves into your investment account automatically to help you build your savings.
UNest makes it easy to choose the right investment strategy for your family and the age of your children. Young children might benefit from an aggressive approach, while an older child needs something a little less risky. The app can even make recommendations for your investments based on how old your kid is.
Since this is a tax-advantaged way to save your child’s future, you get tax breaks when you take the money out and use it for your child. Also, you aren’t required to use the funds for education only; they can be used for other things your children may want in the future, like a car or home purchase. This could be a good alternative to a 529 plan.
Coverdell Education Savings Accounts
The Coverdell education savings accounts (ESAs) are designed to help families save money for a child’s education as a government-sponsored savings program. The one downside to this type of account is that you can only contribute the maximum amount of $2,000 per year, including everyone’s contribution.
This plan offers some flexibility on usage. You can use the funds to pay for college or K-12. You can also use the money for books, uniforms, and more educational expenses.
All the funds need to be used when the designated child turns 30, except in exceptional cases. You won’t pay taxes on these funds unless it goes over the yearly tuition costs and other educational expenses.
The Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) are custodial savings accounts for a child’s future education. By custodial, it means that the accounts always belong to the child, and control of the account transfers to the child as soon as they become legal adults.
You don’t pay taxes on income earned by the account, but you might be responsible for taxes if you go over the tax limit for a gift to your child. Your child might need to pay taxes on the amount if it’s over the yearly limit. However, you can contribute as much money as you like to this account.
Roth IRAs for children is a very popular saving account option. This is an investment account that needs to be opened for the minor child by one of their family members as long as the child has an earned income. It’s generally the choice of families with higher incomes.
The funds in these accounts for a variety of items by the child. It isn’t limited to educational purposes only. This is a tax-deferred account, so you don’t pay taxes on its income before using it. It’s also a custodial account that automatically reverts to the child when they reach the age of majority for your state.
529 Plan Alternatives
When it comes to investing your money into your child’s future, you may prefer the most earned income or safety. Everyone is different, and your goals and comfort levels need to be met. As long as you start saving, it’s a matter of preference for which account you choose. You’ve got this!