How to Pick the Right College Savings Plan for Yourself (3 Questions You Need to Ask Yourself)

0
459

The cost of college might be scary. But saving the smart way can help you deal with costs. There are many plans. Your choice should factor in your age, location, risk tolerance, and personal values. Your college savings plan should provide enough funds to pay for college. It should also limit your student’s debt and allow flexibility in the options of schools.

Bearing these factors in mind, here are important questions to ask yourself before choosing a savings plan:

1. How much do you need to save?

The amount you need to save will depend on several factors, including age, financial capacity, and savings goal.

The first thing you want to do is determine the estimated amount you will require. This gives you an idea of how much you may need to set aside.

The amount you need will depend on whether you wish to attend a private or public school. Private colleges’ tuitions often cost three times more than public.

According to US News data, the average tuition cost for private universities is $39723 for a four-year course. Public universities cost an average of $10423. A scholarship may reduce the cost if you obtain one.

2. What tax benefits can you get?

Several colleges offer tax benefits on college savings plans. Choosing such a plan will benefit you by enabling you to save more. Tax benefits can be awarded on a federal or state level. You can enjoy state or local tax exemption if you choose a savings bond. Other benefits may apply to your 529 plan. It would be best to research what tax advantages you can get where you are located. These tax benefits will increase your savings and can only benefit the plan.

3. What costs are associated with the savings plan?

Fees are associated with a savings plan, and these vary according to the method you choose. Pay attention to slight differences in costs because they matter. Remember that the savings plan is a relatively long-term one. Small amounts can become larger over time. Whether you invest in stocks or mutual funds, ensure you understand the commission structure. And choose the plan that is best for you. The one with higher costs should give better returns than a low-fees option.

Types of college saving plans

Whether you are saving for yourself or your kid, there are more than a few options. Below, we examine the common ones offering good returns and low costs:

529 Plan

This savings plan is the most common because of its tax benefits. The contributions you make to the account are invested in low-risk markets, which could yield reasonable returns for you in the future. As long as you use the funds for college, withdrawals remain tax-free.

But if you use the money for a purpose other than college expenses, the tax gets deducted from the returns, not the amount you contributed. A penalty tax may also apply.

529 plans vary according to the state. The investment portfolio for each state is different. But no matter where you live, you can apply for a 529 plan in any state. This saving plan does not have any income restriction or contribution limit.

High-yield savings account

A savings account is a conventional way to set money aside. This type of saving plan will not earn big returns, but they come with no withdrawal rules or tax penalties. Also, remember that the Federal Reserve is currently raising interest rates. The plan offer more potential returns based on this.

If you change your mind about college in the future, you can use the funds for something else without getting penalized. Additionally, a high-yield savings account means you won’t miss out too much on potential earnings.

3. Mutual funds

Mutual funds are a great way to save for college. They are investments containing a diversified portfolio that the investment specialist manages on your behalf. A mutual fund can contain bonds, stocks, or other securities. The returns depend on the portfolio’s performance. They can be in dividends, bonds, or capital gains. Such plans are great for college or retirement because long-term investments often pay off. There are numerous mutual funds to invest in, with no limit on how many ones can choose. A significant drawback of this savings plan is that it is not tax-free.

4. Stocks

Another great way to save for college is investing in the stock market. Although it carries a higher risk than other options, it can yield greater benefits.

Due to its risky nature, it is advisable to contact a stock broker or investment professional. These people can help you effectively manage your portfolio for a more rewarding investment.

Stock investment, too, does not enjoy any tax advantage. The earnings will be taxed, and the amount depends on the income.

Other college savings plan alternatives are:

  • Savings bond
  • Coverdale ESA
  • Roth IRA
  • Custodial accounts

Deciding which one to choose should depend on these points:

  • Will you use the money for college expenses ALONE?
  • How much will you contribute?
  • Do you expect to use the funds for other expenses other than college?

A 529 plan will be ideal if you can use the money ONLY for college expenses. If you anticipate other expenses that may not be college-related, you might want to consider other options. Some savings plans also have contribution limits and income restrictions. Ensure you check on these to avoid choosing a plan that does not align with your goals or pocket.

Conclusion

The best college savings plan varies according to the individual. The most important thing is to start now. Luckily, the several options offer flexibility in terms of income and budget. There are options for different preferences, whether you choose the investment route or purely savings.

 

LEAVE A REPLY

Please enter your comment!
Please enter your name here