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, don’t miss this guide and college savings calculator!
- College Savings Calculator
- Cost Of Going To College
- How much do you need to save for college expenses?
- 529 Plans
- Traditional And Roth IRAs
- Coverdell Education Savings Account
- Children's Education Savings Plan With Life Insurance
- How Do Deferred Annuities Help With College Savings?
- Other Methods of Funding College
- Next Steps
- Children's Education Savings Plan Quotes
- Frequently Asked Questions
- Related Reading
- Earn The Highest Interest Rates On Savings Today
College Savings Calculator
Achieve your college savings goals! First, 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.
Cost Of Going To College
The total college costs can vary significantly depending on several factors of undergraduate college costs, including the type of college or university, location, degree program, and financial aid availability.
In the United States, for example, the average annual tuition and fees for a four-year public college are around $10,560 per year for in-state students, while the cost for out-of-state students is around $27,020 per year. In a four-year private college’sOn the other hand, the average tuition and fees are around $37,650 per year.
|Current Age||In-State Tuition (Public)||Out-of-State Tuition (Public)||Private|
If you need help with budgeting and saving for your child’s college tuition, we recommend the following:
How much do you need to save for college expenses?
The amount you need to save for college expenses can vary widely depending on several factors, including the type of college or university your child plans to attend, the length of the program, and the cost of living in the college board’s area.
According to the College Board, the average tuition and fees for the 2021-2022 academic year were $10,560 for in-state students at public four-year colleges and $37,650 for private four-year colleges. Room and board can add thousands of dollars to these costs, as can other expenses such as textbooks, transportation, and other personal expenses.
Investing in a tax-smart investment is one way to save for your child’s or grandchild’s college education. 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 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 to any state’s eligible institutions at the future cost. 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 SECURE Act, passed by the US Congress in 2019, includes provisions to help individuals and families save for college expenses through 529 plans.
One of the main provisions of the SECURE Act allows 529 plan funds to be used for expenses to start education related to registered apprenticeship programs and to pay off up to $10,000 in student loans. This expands the use of 529 plan funds beyond traditional college expenses, providing more flexibility for families saving for education.
Another provision of the SECURE Act allows individuals to withdraw up to $5,000 from their retirement accounts penalty-free to cover expenses related to the birth or adoption of a child. This can provide additional financial support for families facing the high costs of child-rearing and college expenses.
Traditional And Roth IRAs
Both traditional and Roth Individual Retirement Accounts (IRAs) can be used to save for college expenses, although they work in slightly different ways.
Traditional IRAs allow contributions to be made on a pre-tax basis, meaning that contributions reduce taxable income in the year they are made. However, withdrawals from a traditional IRA are subject to income tax at withdrawal time. This can be an advantage if the account owner is in a lower tax bracket when they withdraw the funds to pay for college expenses than when they made the contributions.
On the other hand, Roth IRAs are funded with after-tax contributions, meaning that contributions are made with income already taxed. The advantage of a Roth IRA is that earnings grow tax-free, and withdrawals are tax-free as long as the account has been open for at least five years and the account owner is over 59 and a half. This can be an advantage if the account owner expects to be in a higher tax bracket when they withdraw the funds for college expenses than they are currently.
Coverdell Education Savings Account
A Coverdell Education Savings Account (ESA) is an investment account designed to help families save for qualified education expenses, including college expenses, for a designated beneficiary.
Contributions to a Coverdell ESA are made on an after-tax basis, meaning that they are not tax-deductible. However, earnings in the account grow tax-free, and withdrawals are tax-free as long as they are used for qualified education expenses, including tuition, fees, books, supplies, and room and board for eligible institutions.
One advantage of a Coverdell ESA is that it can be used for various educational expenses, not just college expenses. Funds in a Coverdell ESA can be used for qualified expenses at elementary, secondary, and post-secondary schools.
However, there are certain limitations to a Coverdell ESA. For example, the maximum contribution per year is $2,000 per beneficiary, and contributions are only allowed for beneficiaries under 18. Additionally, there are income limitations on who can contribute to a Coverdell ESA.
Children’s Education Savings Plan With Life Insurance
A children’s education savings plan with life insurance is a type of investment and insurance product designed to help families save for college expenses while providing life insurance coverage.
This college savings plan typically involves making regular contributions to an investment account earmarked explicitly for education savings. The funds in the account can be invested in various securities, such as mutual funds or exchange-traded funds (ETFs), to grow over time potentially.
In addition to the education savings component, a children’s education savings plan with life insurance also provides a death benefit if the account owner, typically a parent or grandparent, passes away. This can provide financial protection for the child or other designated beneficiaries, helping to ensure that their education expenses can still be covered even if the account owner can no longer contribute to the current savings account.
Free Guide: Using Life Insurance To Pay for College
How Do Deferred Annuities Help With College Savings?
Deferred annuities can be a valuable tool for college savings because they provide a way to save money for the future while deferring taxes on the growth of those savings. Here are some ways in which deferred annuities can help with your college savings goals:
- Tax-deferred growth: With a deferred annuity, you can contribute money to an investment account that grows tax-deferred until you withdraw the money. This means that you won’t have to pay taxes on the growth of your savings until you start taking withdrawals, which can be a great way to maximize the growth of your savings over time.
- Flexible contribution options: Deferred annuities typically allow you to make contributions flexibly, which can be helpful if you cannot make regular contributions. This can be especially useful if you have an irregular income or want to save money in a lump sum.
- Control over investments: With a deferred annuity, you have control over the investments in your account, which can be a great way to ensure that your savings are being invested in a way that aligns with your goals and risk tolerance.
- College savings options: Some deferred annuities offer specific college savings options, such as 529 plans or education savings accounts, which can provide additional tax benefits and savings incentives.
Overall, a deferred annuity can be a valuable tool for college savings because it provides a way to save money for the future of college costs while deferring taxes on the growth of those savings.
*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.
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 your contribution 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.
A UGMA account and a UTMA account allow you to put money and assets in trust for your child or minor grandchild. 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 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.
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.
|N/A||CloudBank Savings Account||5.05%|
|12 Months||Bread Savings CD||5.20%|
|24 Months||Idabel National Bank||5.05%|
|48 Months||Americo Fixed Annuity||5.05%|
|5 Years||Americo Fixed Annuity||5.25%|
|10 Years||American National||5.45%|
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 can be expensive, and we expect educational costs to increase, 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
Frequently Asked Questions
How does education cost inflation impact a college savings plan?
Education cost inflation can increase the cost of college over time, making it more challenging to save enough for college without adjusting your savings plan accordingly.
What types of college savings accounts can I use with a college savings calculator?
A college savings calculator can use different accounts, including 529 plans, Coverdell Education Savings Accounts, and custodial accounts.
When can I expect educational costs?
Educational costs can be expected when your child begins attending college, and a college savings calculator can help estimate these costs based on current and projected expenses.
What is the average annual compounded rate, and how does it impact my college savings plan?
The average annual compounded rate refers to the expected rate of return on your college savings investments and can impact the growth of your savings over time.
Can a college savings calculator help me compare investment options with significantly lower risk?
A college savings calculator can help compare lower-risk investment options, such as savings accounts and CDs, with higher-risk options, like stocks or mutual funds.
How do average published costs differ from actual college expenses?
Average published costs are estimates provided by colleges, while actual expenses can vary based on factors such as financial aid, scholarships, and personal expenses.
What is the current estimated cost of college?
The current cost of college estimates the total expenses associated with attending college, including tuition, fees, room and board, and other costs.
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