Options for Investing the cost of higher education for your child
The cost of higher education is increasing by double-digit percentages year over year; having a solid savings strategy for your child’s education is more crucial than it has ever been in the past. The majority of families will realize that their higher education costs will be significantly more than they’ve saved up for their children’s education. Many kids will have to seek financial aid to cover some of their college expenses. This article aims to look at the pros and cons of four commonly used investment options when planning for college. The article also discusses how some of these choices are superior to others when you consider a percentage of your child’s education could be financed by financial aid.
529 College Savings Plan 529 savings program for college is an essentially new investment choice for college savings. It is a great way for everyone to fund college. There are many advantages of the 529 college savings plan; however, perhaps the most important is the earnings you earn tax-free if you utilize it to pay for eligible education expenses. In addition, your maximum contribution can contribute to a plan with a 529 could be up to several hundred thousand dollars based on your state. If you decide not to use the money to attend college, you may withdraw your earnings. However, you’ll have to pay taxes and pay a 10 percent penalty. The penalty is reduced if your child is awarded an award of scholarship or is disabled, or dies.
Five hundred twenty-nine plans are usually bought through the broker or mutual fund firm. However, the disadvantage is that this may occasionally restrict your investment options because the process of qualifying to receive financial aid is determined by the assessment that considers your children’s assets. An important benefit of college plans is that cash within the plan is classified as the parent’s assets, meaning that less than six percent of its amount is considered to factor in your child’s credit eligibility for financial aid.
Uniform gifts to minors and uniform transfers to Minors Act
(UGMA/UTA Custodial Account)The advantage of a UGA/UMGA Custodial Account is that it does not limit the amount of money that can be contributed. It is simple to establish in all financial institutions. However, the drawbacks exceed the advantages. The primary drawback of a UMGA/UTA Custodial account is that these accounts have only a small tax benefit. When your child is less than 14 years old, only the first $800 in income is tax-free. The following $800 is taxed according to your child’s tax rate, and then there’s no tax benefit whatsoever. Another major restriction is that the bank account needs to be created under the name of your child. Suppose your child requires financial assistance and will evaluate all assets at a rate of 35. So, this kind of account is not recommended for anyone who needs financial assistance.
Coverdell Education Savings Account (CESA) The definition of a Coverdell Education Savings Account will be quite similar to the 529 college savings plan. The major difference is that in the Coverdell Education Savings account, you can contribute only the amount of $2000 per child. To get your income to qualify, your adjusted gross must be lower than $110,000 for singles and less than $220,000 for married jointly filing. The account is considered an asset owned by the parent, which means that less than six percent of its value is counted against your child’s financial aid ability.
Parents need to think about planning for college as a crucial process, and the three options above could make the process simpler and financially secure.