Three ways parents can start investing for college
Whether you’re starting a family or have a child in high school, chances are the cost of college is not far from your mind. Investing, especially if you’re still in the family-planning stage of life, can be a great way to maximize your savings.
Here’s a rundown of some ways to grow your money for education:
529 College Savings Plan: This tax-advantaged educational investment account helps you stash away cash for college (or other post-high school trade schools). A 529 allows money to grow tax-free, and withdrawals are tax-free as long as the money is used for qualified expenses. Even if you don’t have kids now, you can still open an account under your own name now and simply change it later. Many 529 plans give the option of picking investments from a menu of funds, or selecting a general age-based plan where your money is automatically managed according to the date at which you expect to start paying tuition.
Each state offers its own 529 plan. You’re free to use a plan from any state, though keep in mind that each state has its own guidelines for tax deductions on contributions, up to $13,000 per contributor each year. If you’re not an experienced investor, you might feel more comfortable in an age-based plan. If you are comfortable selecting funds, you may be able to get a better return with your own management.
Your action plan: First, check to see if your state offers a write-off on contributions. If it does, that’s likely your best deal. If not, shop around and look for a 529 plan that offers Vanguard funds, which are low cost. Learn more about the options in your state: New York, Pennsylvania or Massachusetts.
Coverdell Education Savings Account: This is another kind of tax-advantaged account where money can grow tax-deferred and withdrawals are tax-free for qualified expenses. Unlike with 529 plans, funds can also be used for elementary and high-school expenses, including uniforms. One drawback is that you can only put away only $2,000 per child per year and contributions are not tax-deductible.
Regular Investment Account: If you want to get a head start on general saving, a regular investment account is another option that is a better than just storing money in cash savings. With a long-term goal like college for a young child, you can afford to take more risk to grow your savings. Unlike with special education accounts, there is no tax advantage — but there are also no qualifications or limits for withdrawing funds whenever you need them.
These are just general guidelines to help you get started, so do some research to see what the best plan is for you. The earlier you start, the more likely you (and your children) will be able to handle the cost.
Jon Stein is the founder and CEO of Betterment, a leading online investing company that delivers smart, personalized financial advice paired with low fees and a superb customer experience. As a special offer, Metro readers can start a Betterment with the first 90 days free. Got money questions? Hit us up at email@example.com.