Thankfully, just like with retirement if you start planning for your child’s college education early, financing it becomes less painful. With the upward trend in college tuition, low return rates from a conventional savings account might not be able to keep up with the constant increase.
State and private college savings plans and other alternative methods (such as using a Roth IRA account for college savings) are a good place to start:
State 529 College Savings Plans
College savings plans are a great way of saving for college since they are tax deductible during the life of the plan and at withdrawal. Nearly every state has at least one savings plan, but in choosing the right college plan for your child, certain factors such as administrative fees (in cases where you cannot purchase the plan directly and have to use a broker), tax breaks and performance come into play. Morningstar, an independent investment research company, annually ranks the best college state savings plans based on many of these factors and is a good starting point in choosing which plan is the best for your child. It is also important to note that you do not have to purchase a savings plan offered by your state of residence, you can purchase a plan from any state. However, your state might offer better tax breaks on their plans but this might be offset by higher administrative fees or low performance.
College Savings Plans Network (CSPN) is also a good resource for learning more about state college savings plans from all participating states.
This U.S.News article provides information on the kind of questions you should be asking about your college savings plan.
Picking the right college plan: Forbes Magazine article.
This article from 360 degrees of financial literacy looks at pro and cons of 529 college plans.
Private 529 College Savings Plan
The private college saving plan is offered by Tuition Plan Consortium, LLC (TPC), a national group of private colleges and universities. The unique feature of this plan is that it allows one to lock up the present day tuition rate for up to 30 years at nearly 300 participating institutions.
Pros and cons of the private 529 College Savings Plan: New York Times article.
Is the private plan right for you: nerdwallet article.
If not used for college related expenses, you will have to pay a tax penalty (income tax and 10% penalty) to withdraw funds from the 529 college savings plan for other purposes.
Use Roth IRA Account for College Savings
Alternatively, one can use a Roth IRA to save for a child’s college education. Although not as popular as a 529 college savings plan, using this individual retirement account (IRA) offers certain advantages over college savings, especially if the money ends up not being spent on education, it can be easily steered to other use without incurring penalties as in the case of a 529 plan. Additionally for college expenses, the Roth IRA is exempt from early withdrawal penalties (i.e. before the age of 59 1/2). However, by using the Roth IRA for college savings, you are taking away a valuable component of your retirement plan since the annual maximum allowable contribution is $5500 ($6500 if your are over 50 years).
Read all about Roth IRA at rothira.com