Everyone knows starting to save for college early is essential, but what fund will provide the most value? Learn more from our college savings experts.
When a family welcomes a new member into the fold, it’s an exciting time for everyone, but it also means that parents and relatives need to start planning for the future of the new baby. This process requires considering an extensive list of needs that could arise as the child grows up, chief among them the need for money to pay for a college education. As the magnitude of this expense increases year after year, the prospect of saving for higher education can seem daunting, but picking the right college fund can go a long way toward providing for the future of your child, niece, nephew, or grandchild. For more on how to start a college fund for a child or baby, keep reading as the college savings plan experts over at Sootchy delve into this important topic.
When you’re ready to start putting money toward your child’s college fund, you’ll need to browse the options and determine which one might best fit your family’s financial requirements. Depending on the type of fund you choose, there could be limitations on the amount of money you can contribute, how the funds are used, and what investments are available, not to mention concerns like how the account might factor into a future Free Application for Federal Student Aid (FAFSA) submission. Here, we’ll look at a few of the most popular types of college funds for new babies.
Though they all fall into the category of “529 plans,” there are actually three different college funds under this umbrella: college savings plans, which are relatively flexible in terms of how funds are invested and used; prepaid tuition plans, which allow you to put money toward tuition at an in-state college or university; and ABLE accounts, which help cover the expenses – including the cost of higher education – for Americans with disabilities. These accounts are notable because they come with some substantial tax benefits: for instance, gains are free of income tax, but only when used on qualified expenses.
Under the Uniform Gifts to Minors Act (UGMA), parents and other family members can donate to an account made in the child’s name and managed by a custodian until they come of age. The funds in these accounts can be used to invest in stocks, mutual funds, bonds, and other types of securities on the child’s behalf, and returns are taxed at the child’s lower rate.
In some ways, a Coverdell account is like a 529 plan – gains grow tax-free, and they can only be used for certain education-related expenses. However, there are a few notable differences; for example, the amount a parent can contribute per year is very limited (typically to $2,000 or less), and once the child reaches the age of majority, they gain full control over the account and the assets contained therein.
Once you’ve picked out the type of college fund that best suits your purposes, you’ll need to shop around a bit. The details, benefits, and restrictions surrounding certain plans can vary widely from one provider or administrator to another: Take 529 plans, for instance. Each state offers its own version of this tax-advantaged investment plan, and features like fees, minimum contributions, investment options, and qualified expenses can differ from one account to the next. Fortunately, you can choose a plan from just about any state, though some states offer their own income tax incentives for those who use that state’s plan; in addition, seven states offer tax breaks to residents who invest in any 529 plan, so look into your state’s policies before deciding.
Along with the details of a given college fund, make sure you consider the impact this asset could have on your baby’s chances of receiving financial aid one day. When calculating an applicant’s level of financial need, the federal government treats accounts differently depending on who owns the asset. If you were to open a 529 plan in your own name with your child as the beneficiary, only 5.64% of the value would be considered part of your family’s assets, whereas 20% of the value of a child-owned account would be considered; in other words, a custodial account could substantially lower the amount of aid they receive, since those funds are in the child’s own name. In addition, a college fund opened by a non-parent relative, such as a grandparent, can contribute as much as 50% of its value to the calculation of financial aid, which could hurt the student’s finances in the long run.
After the account owner and exact college fund have been determined, all you’ll have to do is apply for the plan, add some money to get it going, pick your investments, and you’re done. The application processes are often fairly straightforward, and many plans offer largely automated investment options, such as the age-based portfolios in 529 plans. You can also change investments later on if the account isn’t performing as well as you’d like, so don’t worry too much about perfecting the account right off the bat, and consider seeking aid from organizations like Sootchy, which helps families start 529 college funds every day.
Even before their child is born, parents often dream about the possibilities open to their new baby, but careful planning and preparation are required to take full advantage of the opportunities in your child’s future. If you’re ready to open a college fund and start saving up for your child’s education, know that the knowledgeable experts at Sootchy are ready to help guide you through the process. Visit us online to learn more today or download the Sootchy app now.