College Savings Calculator: A Guide To The Children’s Education Savings Plan

What is a Children’s Education Savings Plan? This guide will discuss ways to pay for college and how it can help you provide a child’s college education fund in the future. We’ll also discuss the plans available to new parents looking to save in a college fund for babies. So if you’re considering saving for your children’s educational needs, be sure not to miss this guide!

Cost of Going to College

College costs are increasing. According to the College Savings Plans Network, the education cost inflation increases by two times the inflation rate each year. Here’s what you can expect on college pricing:

If you need help with budgeting and saving for your child’s college tuition, we recommend the following:

529 Plans

If you want to save for your child’s or grandchild’s college education, one way to do it is by investing in a tax-smart investment. These plans and accounts will help you save money while keeping the money safe from the IRS.

A 529 plan is a tax-advantaged educational savings program for people who want to save for their child’s college expenses.

The contributions that you make with after-tax money are limited. For example, you may contribute a specified yearly limit of $17,000 in 2023.

If you withdraw money from a 529 plan, the funds are entirely federally tax-free (most states provide tax-free withdrawals, too) as long as they are used for qualified education costs.

Types of 529 Plans

There are two types of 529 plans:

• College Savings Plans: These plans function similarly to other investment programs such as 401(k)s and individual retirement accounts (IRAs) in that your contributions are invested in mutual funds or other investment products. Account earnings are based on the market performance of the underlying investments, and most plans provide age-based investment choices that become more conservative as the beneficiary approaches college age.
• Prepaid Tuition Plans: Although they are not tax-advantaged, prepaid tuition plans (also known as guaranteed savings plans) enable families to guarantee today’s tuition rate by prepaying for it. When the beneficiary enrolls in college, the program pays out at the future cost to any state’s eligible institutions. In addition, you can transfer the account’s value or receive a refund if the beneficiary attends an out-of-state or private institution. State and higher education institutions may offer prepaid tuition plans, although only a few have done so thus far.

529 Plan Cons

Although the 529 Plan has tax advantages, there are penalties for withdrawing funds for a non-eligible college expense or claiming non-education-related tax credits. In addition, the 529 Plan may be subject to fluctuations in the stock market, meaning there is greater financial risk.

The SECURE ACT

The Setting Every Community Up for Retirement Enhancement (SECURE) Act allows 529 plan funds to pay off up to $10,000 in student loans and registered apprenticeship programs.

Traditional and Roth IRAs

Before you reach age 59 1/2, parents and grandparents can withdraw funds from your traditional or Roth IRA without paying the additional 10% tax to pay for qualified higher education costs for yourself, your spouse, or your children or grandchildren in the year the withdrawal is made. The exemption applies only to the 10% penalty, not ordinary income taxes.

Cons

• IRA distributions can be counted as income on the following year’s financial aid application, affecting eligibility for need-based financial aid.
• IRAs may be subject to fluctuations in the stock market, meaning there is greater financial risk.

Coverdell Education Savings Account 

A Coverdell Education Savings Account (ESA) may be established at a bank or brokerage firm to pay for your child’s or grandchild’s qualified education costs. Coverdell ESAs, like 529 plans, allow money to grow tax-deferred and are tax-free when used for qualifying educational expenses at the federal level.

Cons

• You will be charged tax and a 10% penalty on earnings if the cash is spent on nonqualified activities.
• Coverdells may be subject to fluctuations in the stock market, meaning there is greater financial risk.
• Coverdell ESA contributions are not tax-deductible. It would help if you made the contributions before the child is 18 years old unless they have a disability.
• The maximum contribution per beneficiary per year is limited to $2,000.

Children’s Education Savings Plan With Life Insurance

A policy that provides parents’ life insurance coverage for a specified period of time chosen by you – between 10 and 20 years. You’ll receive a guaranteed payout for your child at the end of that term. You can use the money to cover your child’s college expenses or anything else that your child needs on their path to financial independence with fantastic tax benefits.

If you die before the policy matures, your child or other beneficiaries will pay the total benefit amount.

Thanks to each premium payment, the money in your College Plan insurance policy will compound over time. So when you’ve made all premium payments, and the coverage term has ended, you’ll get a guaranteed payout – which could go a long way toward assisting your kid in paying off their college debt.

See Gerber Life Insurance.

Pros

• There are no annual contribution limits.
• The investment is protected from stock market downturns.
• There are no restrictions regarding how to use the payout money.

Cons

• The earning potential is less than a 529 Plan, but there is a guaranteed payout to offset this limited growth.

Free Guide: Using Life Insurance To Pay for College

Deferred Annuities

Deferred annuities are long-term savings accounts that grow tax-deferred. Some plans include sign-on bonuses for premiums contributed through the years and principal protection (fixed and fixed index annuities).

Pros

• No contribution limits.
• Only the interest earned is taxed once withdrawals are made. Roth IRA annuity withdrawals are tax-free (if IRS rules are followed).
• Principal protection on most plans
• Guaranteed payouts
• More upside than life insurance.

Cons

• Parents and grandparents must be 59.5 to avoid early withdrawal penalties (10% of withdrawal plus income tax). A 72q distribution could be a way around the penalty.
• Long-term plans

Other Methods of Funding College

Bank Savings Account

In addition to financial aid, this is a traditional method for growing your child’s savings through regular deposits. However, remember that interest rates on these accounts are meager, so building wealth beyond what you contribute will be hard. Also, the interest earned on bank savings accounts is taxable.

Stocks and Mutual Funds

These investments are more aggressive ways of growing your child’s college savings. They can increase in value quickly but are subject to changes in the stock market, and there is no guarantee of a payout.

Custodial Accounts

A UGMA account and a UTMA account allow you to put money and assets in trust for your child or grandchild who is a minor. The trustee (you) manages the account until the child reaches the age of adulthood. At that point, they own the account and can use it wherever they want.

Cryptocurrency

Cryptocurrency has been making headlines lately, and it’s no wonder why. This new digital currency offers a unique way to save and invest money. And now, parents can use cryptocurrency with apps like UNest to save their children’s college tuition. There are a few different ways to do this. One option is to purchase a specific cryptocurrency designed for education savings. Another option is to set up a cryptocurrency savings account and deposit it regularly. Whichever method you choose, cryptocurrency can offer a novel way to save for your child’s future.

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost if you purchase a policy.

Earn The Highest Interest Rates On Savings Today

Fixed annuities are almost identical to Certificates of Deposit (CDs) accounts and provide higher interest rates and penalty-free withdrawals for income.

Disclaimer: This is a review. The Annuity Expert is not associated with a bank or credit union. However, fixed annuities are sold at most financial institutions. We aim to help you find the highest interest rates for your retirement savings. We may receive a small referral fee if you purchase something using a link in this article.

College Savings Calculator

Achieve your college savings goals! Use our college savings calculator to estimate how much you can save for room and board, tuition, and other college expenses. Then, input your principal balances, monthly contributions, interest rate, and duration to estimate total college savings goals.

Next Steps

College can be expensive, and expect educational costs to increase in the future, but it doesn’t have to break the bank. A Children’s Education Savings Plan offers parents a way to save for their children’s college expenses while taking advantage of tax benefits. If you’re looking for a way to start saving for your child’s education, contact us for more information about our plans and how they can benefit you and your family. With careful planning, you can make paying for college a little easier for yourself—and your kids will appreciate it!

Children’s Education Savings Plan Quotes

Related Reading

• Types Of Life Insurance

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost if you purchase a policy. It helps us keep the lights on!