Is there a prouder moment than watching your child walk across that graduation stage to accept their diploma? After years of hard work, your child deserves the chance to get the college experience and gain the education they need to succeed in the real world. Most of all, you deserve the chance to not go broke helping them get there. Here’s how to save smartly.
Look Into 529 Plans
A 529 plan is similar to a Roth IRA, however, it is used for educational purposes rather than retirement. There are some great benefits, including the chance to have your money grow tax-free. Considering private school or need financial assistance with books and on-campus housing? A 529 plan allows you to withdraw on all educational expenses from kindergarten through college.
A Brokerage Plan Allows Flexibility
A brokerage plan allows more flexibility along with little to no restrictions. This plan will allow you to invest and withdraw however much you want, whenever you want. Sky’s the limit.
In this situation, you do not have to use your money solely for educational purposes as you do with the 529 plan.
Know The Cons
As with any savings or investment plan, it is crucial to know the cons before you get into it.
A 529 plan may sound ideal for your needs, but be aware it does come with restrictions. For example, if the money is not used towards educational purposes it will be taxed as regular income, along with a 10% withdrawal penalty.
A brokerage plan comes with downsides too, one being that it does not offer tax breaks.
Are Tax Breaks Worth It?
One of the major benefits of the 529 plan is the tax breaks and there are several factors in determining how much they are worth.
Calculations are based on the amount invested, time, tax rates, and what state you live in. It is important to crunch the numbers for the penalty withdrawal fees as well, on the chance the money needs to be used elsewhere.
Choosing What Is Right For You
The most important part of choosing the best way to save for college is doing what is best for you and your family. Everyone’s situation is different so establishing your primary needs is key.
Ask yourself exactly what you plan to use this money for, how long are you planning to save, and if would you benefit from tax breaks?
Remember the right decision is what is right for you and it is never too early to start saving.