How to Start a College Savings Plan
College is one of the biggest expenses parents and teenagers face today. Whether it’s a state school, private university or a community college, secondary education expenses can add up quickly once you factor in tuition, room and board, and books. If thinking about paying for college is overwhelming to you, consider the steps you can take ahead of time. Here are a few of my tips for how you can start a college savings plan for your kids – or for yourself.
Determining Your Savings Goal
For any of you who are like me, you like having a goal outlined so you can plan how best to achieve it. When it comes to college savings, consider these questions to help you set your savings goal.
- How much of the college education will be paid for by a parent or another relative?
- How much will the student be responsible for?
- How much can you expect to have covered through scholarships?
- How much time do you have to save?
- How much will need to be taken out in student loans?
Understanding the answers to these questions can help you determine how much you’d like to save over time, which may come in handy when you’re determining the type of accounts to use for your savings plan.
College Savings Accounts
Before starting to build out a college savings, look into which types of accounts are out there. Some of which may be offered by your bank, while others may be offered by other financial institutions. A couple popular accounts for college savings include:
- College Savings 529 Plan: 529 plans are tax-advantaged savings plans, sponsored by states, state agencies or educational institutions as a way to encourage saving for future college costs. This is an investment account, and the money you put into the 529 plan can only be used to pay for qualified higher education expenses. In Iowa, you can open a 529 account with as little as $25 and contribute up to $420,000 per beneficiary. Learn more about Iowa’s College Savings 529 plan and the benefits that come with it.
- Roth IRA: A roth individual retirement account (IRA) is another tax-advantaged savings account that many use for college savings. The roth feature enables you to contribute after-tax money. While you typically can’t withdraw funds from your retirement account until you’re age 59½, Roth IRAs do allow you to take our funds tax-free and penalty-free to pay for qualifying educational expenses after five years.
There are many other types of accounts and ways you can save for college, as well. For example, using a CD to help grow an amount of money you already have or setting up a separate high-yield savings account. Talk to your banker or financial advisor to see which option may be best for your situation.
Building College Savings into Your Budget
One sure way to build up a savings for a child’s future education is to start automatically moving money into some type of savings account each month. Just like saving for a vacation, a home, retirement or any other large expense, you can never start saving too soon. And think, with the right savings or investment account, even saving a little each month will add up by the time high school graduation rolls around.