6 Things to Explore When You’re Creating a College Fund

Money & Relationships

Pop quiz: How much student loan debt do you think the average college student racks up by the time they cross the graduation stage? $5,000? 10,000? Try again! The average college graduate’s student loan debt is almost 30 grand! And that’s just the average! You’re probably thinking there has to be another way, and there is! So listen up!

You’ve probably heard another scary statistic: Americans owe over $1.56 trillion in student loan debt, spread out among about 45 million borrowers. That’s about $521 billion more than the total U.S. credit card debt.

It is never too early to start thinking about a college fund. Saving for college is a long process, so even though the big day might be years away, the earlier you can begin saving up the better! For the new parents who have no idea where to start, don’t panic! Setting up a college fund is not as daunting as it seems, but there are things you need to keep in mind when setting up your first one.

When Should You Start Saving for College?

Parents should try to start saving for college as soon as they can.  Let’s keep in mind, you likely have other financial priorities like paying off your mortgage, your credit card bill, or your own student loan debt.

Here’s a pro tip: You can use the Turbo app so you don’t neglect your own money goals, especially when it comes to retirement savings.

Choose the Best College Savings Option for You

It all starts with a plan that meets your needs. There are several fund types to choose from, all with their own rules and tax consequences. You can even have more than one account, depending on how your finances change over time.

529 College Savings Plans

A 529 college savings plan is a tax-advantaged account where you can save and invest money for future college tuition and qualified costs. The benefits of this plan are that earnings can grow tax-free and withdrawals are tax-free if the funds are used to pay for education. There are two types of 529 college savings plans: those sold directly by the states and those sold through financial advisors. Direct-sold 529 plans generally have lower investment fees than advisor-sold ones. Advisor-sold plans tend to offer more investment options.

Gift Trusts

Allow parents, grandparents and other donors to give children financial gifts free of gift taxes up to a certain limit; for 2019 the gift limit is $15,000. An attorney is not necessary to set up the fund but to ensure all the necessary requirements are met, a consult or review may be necessary.

Roth IRAs

Roth IRAs are individual retirement accounts that allow people to save and invest after-tax money. Individuals can contribute up to $5,500 to Roth IRA, and up to $6,500 if you’re over 50 (generous grandparents?).  Granny and grandpa or other family members can gift savings bonds, CDs or high-interest savings account contributions instead of gifts in the first couple of years instead of toys is always a good idea!

If you withdraw money from a Roth IRA before you reach age 59½, you would pay a 10 percent early distribution penalty on the money you take out. but you and your children can withdraw the money penalty-free from a Roth if you use it for qualified education expenses.

Brokerage Accounts

Brokerage accounts are similar to a savings account in that you can deposit and withdraw money at any time without penalty. They give you access to any investment that you’d like to buy or sell. These can range from stocks and mutual funds to bonds, currency, and futures.

If you’re saving for a child’s education and have a timeframe of five to 18 years before those funds are needed for college, investing in a 529, Roth IRA, or regular brokerage account can help you maximize the cash you set aside for those future expenses.

It’s never too early to start thinking about a college savings plan. Whether your child is a teenager or toddler, the best time to start a college fund is now!

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