How Should I Save For My Kids’ College?
How Should I Save For My Kids’ College?
April 2, 2020 By Machinist
Priorities
One of the personal finance questions I receive most often is about saving for college. What am I doing to pay for my kids’ college? The simple answer is that 529 college savings plans are the way to go.
A better answer has to include a consideration of how college funding works in harmony with your other financial priorities. In other words, to adequately determine how to pay for your kids’ college you first need to determine what you are really trying to accomplish.
What Are Your Priorities?
It is a noble goal to raise your children to become responsible, well-educated adults that will play a meaningful and productive role in society. Sending your child off for a college education can be a fantastic way to cap off your efforts as a parent toward these goals. It may also improve Junior’s earning potential.
However, college is a major expense that can absolutely derail otherwise responsible personal financial strategies. Therefore, it is important to consider how paying for college works with or against with your other financial priorities.
Secure Your Own Mask First
On airplanes, the flight attendant instructs you to secure your own oxygen mask first before helping others with theirs. The same philosophy is appropriate with regard to funding your child’s college education. There are myriad ways to pay for college including grants, loans, scholarships, work/study, and the military.
Options to pay for retirement are much more limited. And believe me, your kid would rather figure out how to put himself through college than take on the responsibility of supporting you through retirement.
So, if you are not on track to finance your retirement, then the first step is to forget about paying for Junior’s college and get your own finances in order.
529 College Savings Plans
Assuming your finances are on track for retirement, then the best way to help someone save for a college education is through a 529 savings plan. These accounts are typically managed by the state you live in. You deposit money that you have already paid taxes on. Then, the money grows and can be withdrawn for education related expenses without any further taxes. So it works like a Roth IRA or Roth 401(k), but for college.
You can use your 529 money for tuition, books, fees, and even room and board at any legitimate college or university and even trade schools and vocational educational programs. 529 accounts also offer ample flexibility to transfer funds to another recipient if your kid decides not to pursue higher education.
In addition, there are other concessions that allow you to get your money back in case your educational dreams just don’t work out as you imagined. In the worst-case scenario, you can withdraw the funds for non-education purposes and lose no more than a 10% fee.
Other Things to Consider About College
To continue reading, please go to the original article here: