The costs of higher learning continue to spiral upward at a breathtaking pace. Many parents of newborns and small children begin planning for this monumental, future expense at tax time, utilizing their refunds as a jump-off point. It will most likely be necessary to rely upon multiple strategies to pay for the entire cost of your child's tuition, even if you get started when they're small. There are, however, several ways to leverage this year's refund and to get started saving, no matter what your child's age.
529 Savings Plan
Most states currently offer 529 plans as do some educational institutions. 529s offer tax advantages, making it easier for individuals, such as parents or grandparents, to save for college and for other types of post-secondary school training, including eligible vocational and trade schools. The earnings realized from 529s are not subject to federal tax and are usually not subject to state tax, as long as they are used for their designated, educational purpose. Withdrawals can go toward tuition and fees as well as other college-related costs, like room and board, computers and textbooks. Individuals are able to set up multiple 529s with any beneficiaries of their choosing, making them a good investment choice for parents with multiple dependents. Plans vary in both value and incentives, so shopping around makes sense to do before you invest. Individuals can buy a 529 plan in any state they choose, not only within their current state of residence.
Typically used as a retirement vehicle, Roth IRAs can also help fund your beneficiary's college dream and might be a solid investment choice for your refund check to go towards. Withdrawals from Roth IRAs, like all IRAs, are exempt from penalties if the funds used are for educational expenses, although the age of the IRA owner is of significance, with account earnings being taxable for those under 59 as well as for those over 59 ½, if the Roth IRA is less than five years old. Many people prefer Roth IRAs to 529s because of their greater flexibility, but there are strict contribution limits and those with higher-than-average incomes may not be allowed to participate.
Prepaid College Tuition Plan
If staying ahead of escalating tuition costs is your goal, these plans, also called Prepaid Education Arrangements, allow for the purchase of all or part of a public in-state education at its current, not future, cost, with the value of the prepaid amount typically guaranteed by the state. These types of plans may make the most sense for parents whose children are older and already gearing up for acceptance to a public state school, but can still represent a significant savings of at least 5 percent each year when you take the annual tuition inflation rate into account.
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Corey Whelan is a freelance writer in New York. Her work can be found at Examiner.com.
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