Education, they say, is the best legacy. It is an indispensable tool for success in the contemporary world. Through education, various kinds of knowledge could be attained by which one can access a lot of opportunities.
One of the primary purposes of education is to equip one with useful pieces of information which one can rule the world in the current information age. In addition, education enhances creativity and it helps to train our mind to be more productive. Hence, every responsible parent should make an investment in his or her kid’s education of the utmost priority.
Education, like any other thing of great value and worth, is not cheap. In fact, it could cost a fortune.
As parents, the best legacy and heirloom you can give to your children is a quality, sound and standard education. Expectedly, it requires a lot of planning and budgeting because it could cost thousands of dollars to finance.
This article gives you information about some of the best college education investment plans and hence, guides you to secure your kid’s college education.
Saving ahead for your kid’s college tuition may appear like a tall order, however, it is highly achievable provided you get the right hints and apply the knowledge before you start at all.
Depending on where the school is and the standards of education, college education varies in costs. However, before investing in any plan you must carefully appraise the aims, risks, and charges of the plan, such as management levy, maintenance fees etc.
When planning to invest towards your child’s college education the idea of opening a savings account in the name of your child may appear to be a great one. However, over time you might come to realize disadvantages in it in terms of having to pay avoidable taxes and missing out on financial aids. This is because the availability of financial aids to a student depends on the income and assets at his disposal. Often, students with fat savings accounts in the junior high school years may end up being disqualified from college financial aids.
However, the good news is there are several ways parents can invest while still not jeopardizing the chances of their children being beneficiaries of financial aids.
The following are the best education investment plans.
529 College Plans
This is one of the most popular college education investment plans.
529 college education investment plans is a tax-deferred investment plan that operates in the same way as the IRAs and 401(k) plans. It gives parents the opportunity to invest towards their kid’s education through some investment plans.
Some 529 plans that are age-dependent which means they allow funds to grow exponentially when the while is still young and switches funds automatically to the more stable palms as the child approaches the college education.
529 investment plans are tax-favored i.e the tax on the returns are deferred as long as it is used to fund the child’s education, the parents will never pay any tax on it.
Funds in these accounts can be used to finance either undergraduate or graduate studies at any recognized two or four-year university in the US.
Funds in a 529 college savings account are seen as a parent’s asset: the parent owns the account and can change the name of the beneficiary in case the child decides not to go to a college. Although this plan has a lot of merits, it is not without its own demerits. The funds must be used exclusively for education for its returns to remain tax-free, otherwise, it attracts income taxation and a penalty of 10% on earnings.
Prepared Tuition Plans
This is an alternative investment plan to 529 college education investment plans, whereby parents pay a predetermined price in advance for their children’s college education in an in-state public owned university. It is great for parents who are certain that their children will attend college.
Though both prepaid tuition plan and 529 college education plan are tax-favored and still offer financial aids protection, the former is not prone to the stock market swings.
The primary disadvantage of this plan is if the child refuses to attend an in-state university, then the parent will only get a part payment refund of their money.
With prepaid tuition plan, like the 529 college education investment plan, account holders can change the name of the beneficiary at any time. Furthermore, they must also pay a penalty of 10% in addition to being subjected to an income tax if the money is used for something else part from education.
UGMA AND UTMA
Uniform Gift Minors Acts, UGMA and Uniform Transfer to Minor Acts, UTMA are the best custodial plans that allow for a standard tax break for under 18 children even if they don’t and up attending a college.
In these plans, the first $1,000 in returns is tax-free, the second $1,000 is taxed based on the income tax rate of the child and the subsequent returns are taxed based on the income tax rate of the parent.
The major advantage of these plans above the others is that there are no restrictions as to what the money could be used for as long as the child is the direct and primary beneficiary.
The major demerit of the plans is that parents only have little power over how the child eventually spends the money.
Funds in these plans become the beneficiary’s once he attains the age of 18 to 21 years depending on the state. At this point, the child has the exclusive right to decide what to spend the money for.
Kids, once they start making income, can be given a great start financially in life by their parents who open the Roth IRA in their names. Though, account holders are restricted from making withdrawals until he is 59½ years of age. However, exceptional cases such as disability, educational expenses can give the holder the opportunity to withdraw earlier.