How to Give the Gift of a College Education This Holiday
This is certainly a magical time of year. And as a parent, you want to give your kids the best you can during the holidays.
Yeah, they might really, really, really want that gaming console, but we’re thinking of something that’s a little longer lasting, a little more useful. How about the gift of a college education?
Your kids likely don’t need more gadgets, but they do need money for college. So let us walk you through your options for investing in their college tuition fund.
Education Savings Options
According to U.S. News and World Report, the average cost of tuition and fees at a ranked in-state public college is $9,687 for the 2020-21 academic year. The out-of-state tuition is $21,184. Privates colleges average a whopping $35,087 a year.
Sheesh. That certainly adds up over four (or more) years.
Average tuition costs:
$9,687 in-state, public
$21,184 out-of-state, public
(U.S. News and World Report)
It kind of goes without saying that many kids banking on a college education will certainly need and appreciate help in paying for it.
The fact that there are so many options can stop family members in their tracks. So beyond getting financial aid for college, which savings option is right for your child? Let’s take a look.
A 529 plan is a tax-advantaged savings plan you can use to save for your child’s education.
Now, that doesn’t just include money that goes toward four-year colleges and universities. The educational possibilities are practically endless: You can use it for kindergarten to 12th grade private school education; an accredited vocational or trade school program; and off-campus housing, food, books and other college expenses (like computers).
A 529 plan is a tax-advantaged savings plan to be used on a variety of educational expenses from kindergarten to college.
With 529 plans, you can put money into an account (usually small amounts are acceptable!) and watch it grow over time. You can invest in the plan based on your child’s age, and it will automatically adjust to be as aggressive or conservative based on that age and time till college.
When it comes time to withdraw the money from the account, have the money paid directly to your child’s school or college. Easy peasy.
That way, you cut out the middleman and make sure the money goes from Point A to Point B seamlessly.
Education Savings Account (ESA)
An educational savings account (ESA) gives you a variety of investment options that allow you to save $2,000 per year, per child—absolutely tax-free!
An ESA lets you invest up to $2,000/year tax-free.
The $2,000 contribution limit is an overall limit on contributions per child. However, you must contribute less if your modified AGI is more than $95,000 on a single return and $190,000 if married filing jointly. You can’t make contributions if your modified AGI is $110,000 or more or $220,000 filing jointly.
In addition, the amount you save must be used by your beneficiary by age 30. So you’ve got time.
UTMA or UGMA (Uniform Transfer/Gift to Minors Act)
A Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA) differs from ESAs and 529 plans in that they’re not just designed just for education savings.
The account is in the child’s name but is controlled by a custodian—usually a parent or grandparent. The custodian, who enjoys certain tax advantages, manages the account until the child reaches a certain age, which depends on the state in which the child lives. Once the child reaches that age, the child can use the money in the account however he or she wants. (Pretty sweet gig for them, right?)
Note that your beneficiary can use money however they choose once he or she is of legal age.
UTMAs and UGMAs savings can are designated for a specific beneficiary and can be used on anything (not just education.)
So, technically, he or she can go on an expensive trip or buy a brand new car instead of using the money for education. That might feel a little sketchy to some parents, but if you’ve got an honest and responsible kiddo, you can have full confidence that your money’s going to the right place.
Remember, too, that you can’t change your beneficiary after you choose that individual, unlike with a 529 plan.
Ahh, the savings account. Less showy than its counterparts, but gets the job done (albeit safely and slowly).
This much overlooked option uses a regular savings account to put away college savings. Unfortunately, you won’t see much of a return on any contributions to a savings account but you can use the funds for any purpose without any penalty.
Savings accounts offer minimal return on investment but do give a sense of security and can be used for any purpose.
The reason you might want to opt for a savings account is that you know you won’t lose money, and you can use the money in the account for another purpose (or for yourself) if your son or daughter chooses not to attend college.
Pro tip: Shop around for the best rates. You could get a better return on your savings with a high-yield savings account at a bank.
Did you know that you can use a Roth IRA to pay for college? It’s true!
You won’t pay taxes on withdrawals after you turn 59½ years old, which includes any earnings on your contributions.
If you need the money before you turn 59 ½, you can disburse any amount of money you contributed to the Roth IRA at any time and not pay taxes or penalties. (You also aren’t restricted to using the money for education-related expenses, either.) Note: Roth IRAs don’t have required minimum distributions until the death of the account owner.
Contributions to Roth IRAs can be withdrawn tax-fee, but any earnings will be subject to taxes.
Your earnings are a different story— you will be taxed on those but you’re still exempt from the 10 percent federal tax penalty.
The best thing about using a Roth IRA for college savings is that it’s there for you if you need it for college—or it’s there for you during retirement.
Steps to Save
1. Choose where you’d like to put the money.
Did you choose a 529 plan? If so, look into your state’s plan option (or you can also look into another state’s plan—you’re not confined to the state in which you live).
Prefer an UGMA or UTMA? Ask your financial advisor for recommendations on opening an UGMA or UTMA or open one on your own through a brokerage.
Prefer a Roth IRA? Open an account!
The first step is figuring out the type of account you’d like to open.
2. Set up the money to go into the account automatically.
The beauty of setting things up automatically is that you don’t have to think about the onerous task of moving money out each month.
You simply get to live your life and the money gets put into your account every month because you set it up that way.
Commit to adding in a certain amount to this account every month so you continue to grow the money in your child’s account.
3. Check your savings periodically.
How are you doing with your savings? Do you have the amount you thought you might in your account after one year? Five years? Ten? If not, consider how you might up that automatic contribution or back down from it if it’s overloaded.
The point is, don’t lose sight of what’s going on in the account. You wouldn’t want to get to your child’s senior year (if you’re not already there) and find out that you’re disappointed by the amount in the account.
Give the Gift that Lasts a Lifetime
If you really think about it, your gift of education really does last a lifetime—all the way through adulthood and beyond. Education is a lifelong journey and gift. Rather than overload your home with toys (that, let’s face it, last until their next phase or obsession), gift this gift of education.
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