It’s never too early to start budgeting for a child’s future college education. Use these pro tips to get started
Saving for your child’s education when you haven’t even paid off your own student loans yet might seem unreasonable, and you aren’t alone if you think that. David Rosell, author of “Keep Climbing – A Millennial’s Guide to Financial Planning,” suggests you make saving for your retirement a higher priority than saving for your kids’ tuition.“Using the airplane analogy: In the event of a sudden drop in cabin pressure, you put on your own oxygen mask first, and then help children who are traveling with you. The example serves to illustrate the importance of helping yourself first, so that you’ll be in a better position to help others. Parents who make saving for college tuition a priority may run the risk of running short of funds in retirement and becoming a burden on others.” For those who are in a position to do both, though, Rosell recommends starting a 529 savings plan.
Earnings from a 529 are exempt from federal income tax, as long as withdrawals are used for educational expenses.Another perk is that more than 30 states provide tax deductions or credits for contributions into a 529 plan. If your child decides not to attend college, or not to use all the funds in the plan, the savings can be transferred to another family member for the purpose of education. There is no deadline as to when money in a 529 plan must be used. So even you, in your old age no less, could use the money to go back to school if you wanted. Another perk is that you, the parent, are the owner of the account and your child is the beneficiary. So you donât have to worry about your kid emptying it out to backpack around Europe.
The only downside to saving for college via a 529 plan is that if your kid decides to not continue their education, the money in the plan will be taxed when itâs withdrawn. It will also be hit with a 10 percent penalty.Another way to save for your child’s college education is to invest in a ROTH IRA, which permits funds not spent on education to be used for retirement: a win-win for your savings.