Saving money instead of spending it is one of the smartest strategies to prepare for education expenses. A 529 plan is a popular type of education savings account that offers federal and state tax benefits when the funds are used for eligible educational costs. Earnings and withdrawals are completely tax-free when you use the money for college. This type of account is a tax-benefited, state-sponsored investment that helps families save for school.
Money from a 529 savings plan can be invested in many different assets, such as mutual funds and exchange-traded funds (ETFs). The main advantage of this plan is that investment earnings are not taxable, as long as the funds are used to cover eligible educational costs. Eligible expenses include the cost of tuition, room and board, transportation, or equipment when you participate in an internship or attend a university or trade school. A Roth IRA is another great option for saving money for college. It is a tax-advantaged retirement account designed to help you save for your golden years, but the funds can also be used for college.
Money placed in a Roth IRA account is tax-free and you can withdraw funds before you retire without having to pay an early retirement penalty if the money is used to cover education expenses for you, your spouse, your children, or your grandchildren. However, you must pay income tax on account earnings if you make education-related withdrawals, unless the account holder is 59 and a half years old or older. Putting money into a savings account that offers a high annual percentage return (APY) could be a good option for saving for college that you plan to access in the short term. Today, APYs for high-yield savings accounts range from 3% to 5%, which could provide you with a decent return on the money you plan to use in a year or two, or the opportunity to accumulate more money the longer you leave it in the account. Even if you're starting from scratch, there are several smart strategies that will help you pay for college. Saving money specifically for college means you won't be tempted to use it for other purposes, such as a vacation.
However, it's worth starting to save even a year or two before college, as having some money saved can reduce your dependence on loans. Starting to save when your children are young is the ideal strategy, as regular contributions and compound interest over an extended period give your money a better chance of growing. According to the National Center for Educational Statistics, students who worked 15 hours a week or less were more likely to graduate in six years than students who worked harder and even those who didn't work at all. There are many ways to save for college, but for many families, the benefits of a 529 plan outweigh other options. The amount of money saved for college varies greatly depending on parents' income and how far in advance they can start saving for school. Even so, it can be useful to calculate the costs of college, just to get a general idea of how much money you're going to spend on your education.
The amount you need to save for college is probably not the same as what your neighbors or even classmates need to save. By setting up automatic transfers, you don't need to make a conscious decision to keep money in a savings account. This information is intended to be educational and is not adapted to the investment needs of any specific investor. If you still don't have enough money to go to college, it might be time to consider the pros and cons, Barnhardt advises. However, you can talk to your parents or guardians about setting aside a certain amount of money each month to start accumulating funds for college. Whether you prefer investment accounts with flexible spending or you can commit to using the funds only for educational expenses, college savings options are available to you.
With smart strategies and careful planning, saving money for education expenses doesn't have to be difficult.