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How To Start Investing Money for Your Child’s College Fund?

As a parent securing your child’s future is a major priority, especially securing the child’s education. The cost of acquiring higher education has tripled over the last decade and is most likely to continue increasing in value. A study conducted in 2018 showed that the average student loan of one person by the time they graduate is about $ 37,000 due to college tuition fees. Therefore, parents are advised to start saving up for children’s education from a very early age. If you are wondering how to start investing money for your child’s college fund, then here are a few ideas.

The 529 Plans

The 529 plan is a tax-free state-operated plan that allows parents to save for their child’s college education. There are two types of 529 plans available in each state; these are the savings plan and the prepaid plan. The savings plan allows the parent to save, and the money saved is invested, which in turn grows over time. The most prevalent type of investments done in this plan is mutual trusts and bonds.

The prepaid 529 plans allow for the parent to pay for their child’s college fee using today’s credit prices. This is advantageous as it saves on cost. Most individuals prefer the 529 plan because there is no limit as to how much one can save.

Secondly, the money saved can be used to pay for tuition fees from kindergarten to the 12th grade. Additionally, if the savings are not exhausted, the funds can be transferred to another family member. Furthermore, there is the provision of tax relief for any transactions, including withdrawal of funds as long as the cause of withdrawal is for education. However, if you are withdrawing the money for other reasons, state laws and penalties will apply.

People prefer the 529 plan because it allows one to save a large amount of money as the limit for installment in most states is between 250,000 and 500,000.

The Coverdell Education Saving Account

Also known as the Education Savings Account (ESA) is an investment account that caters to your child’s education expenses, which include tuition fees, the cost for books, and travel expenses. ESA offers a wider variety of investment strategies, which will ensure that the money invested will multiply. Since the plan is meant to cater only for education expenses, the is a 10% penalty charge if the funds are withdrawn for other reasons.

Like the 529 plan, ESA can be used to pay for the tuition fee from kindergarten to the 12th grade. It also allows for tax-free withdrawal of the funds. However, the ESA plan has a financial installment limit of $ 2,000. Additionally, the beneficiary can only use the funds until they are 30 years of age. If they turn 30 without withdrawing, they are given 30 days to withdraw the funds, although taxes and penalty charges will still apply.

The Individual Retirement Account (IRA)

The Individual Retirement Account is a type of retirement savings account offered by the state. However, the savings plan can be used to pay for the college tuition fee for a beneficiary. Usually, there is a 10% penalty charged for withdrawals done before one 59.5 years old. However, this penalty can be avoided if the withdrawal is meant to pay for the education of the named beneficiary.

Unlike the 529 and the ESA plan, the funds saved with IRA are subject to taxation; thus, one will lose more money. Additionally, the funds can not be used to pay for the tuition fee in kindergarten to 12th grade. However, the funds can be used as a retirement plan if the amount is more than what the beneficiary has used. People opt for this type of investment education plan, especially when the parents are a bit older. It is beneficial both as a college investment plan and a retirement package. An example of a bank that provides this service is Centris Federal Credit Union a  credit union in Omaha.

The Uniform Gift to Minor Account (UGMA)

The UGMA, also known as the UTMA (Uniform Transfer Minor Account) allows parents or custodians to transfer funds or assets to their children before the child is 18 years of age. The funds or assets are invested on behalf of the beneficiary, and a portion of the profits earned is untaxed. This form of education investment plan offers a wider variety of investments than the 529 programs. However, the parent or custodian has no authority over how the beneficiary chooses to spend their money.

Conclusively, parents must plan for their child’s future by investing in an education plan. The choice of which plan to use is entirely on an individual basis, depending on the needs and the packages offered in each program. Before choosing the plan, time to keenly look at the terms and conditions. Choose a program that will facilitate easy deposits and transfer of funds online.


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