How to set up a college fund for your baby

Turning Points 3 min read

The concept of saving can be daunting, but you have several options when creating a college savings account for your baby:

  • 529 plans
  • Roth IRAs
  • Education savings accounts
  • Life insurance policies

The key thing to remember is that the earlier you start a college fund for your baby, the better off you’ll be. These plans generate interest over time and can grow more the longer they’re open.

Should you start a college fund for your baby?

It’s never too early to begin saving for your child’s college fund. The average cost of tuition for the 2022-2023 school year is around $10,423 for a public in-state school and double that for an out-of-state school, according to U.S News & World Report. Private colleges are even more expensive. When you think of the costs, having a college plan for babies makes sense.

What is a 529 plan?

A 529 plan is a state-sponsored savings plan that invests your contributions. These can offer several benefits for parents, especially from a tax standpoint. Most states will allow you to deduct the contributions you make to these plans, and most of the time, you don’t have to pay taxes upon withdrawal.

One of the key features of 529 plans is that you aren’t limited to the plan offered by your state. You can choose any state plan, regardless of where you live. Different states have different benefits. For example, one state might offer a higher contribution limit, while another might have lower fees.

What is a Roth IRA?

A Roth IRA is an individual retirement account (hence the IRA) that allows you to pay after-tax dollars into a fund. Using after-tax dollars means that, provided you meet all the conditions, you won’t have to pay taxes when you withdraw the funds.

A Roth IRA is designed for retirement planning, but that’s not its only purpose. You can use a Roth IRA for many things, but there are certain drawbacks to using the money for education. Relatives and others can contribute to a 529 plan but not a Roth IRA. You would be the sole contributor. If your child doesn’t attend college, a fund is already set aside for retirement.

What are education savings accounts?

Education savings accounts (ESA) are specialized for specific expenses, typically private school tuition, college costs, and more. You must spend any funds drawn from these accounts on approved costs, such as services or materials.

Many people use an education savings account to supplement a 529 plan. The reason is that the other plan can handle certain expenses that one plan might not cover, such as room costs or extracurricular club fees.

Of course, there are restrictions as well. For example, according to IRS ESA rules, you can’t contribute more than $2,000 per year, and all the funds must be used by age 30, or you face taxes and other penalties. If your child doesn’t attend college, you can transfer the ESA to someone else.

How can a permanent life insurance policy help your child’s college savings?

A life insurance policy is a good investment for various reasons. Life insurance for new parents is essential for protecting your growing family. As you research the different types of life insurance, consider a permanent life insurance policy, such as whole life insurance or universal. Unlike term life insurance, permanent life can provide guaranteed tax-deferred growth. You can also borrow or withdraw against the policy’s cash value, which can work well as a college account.

Another benefit to a permanent life insurance policy is that it doesn’t count as an asset when applying for financial aid, unlike other plans on this list. Your child could apply for grants and loans if the savings aren’t enough.

Saving even a small amount each month can make a substantial difference when it comes time for college, which will be here before you know it. Whether you go with a 529 plan, a Roth IRA, an education savings plan, or a permanent life insurance policy, each of these plans can help you spread out the expenditure for your child’s college education over time – you can consult with your tax or financial advisor if you have questions about your particular situation. If you choose to forego setting up a college fund, you may face sticker shock when the time comes to pay those tuition bills.

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