5 Smart Ways to Save Money for Your Child’s Education

College seems far away when your kid is still learning to count to 10. But the reality is time moves fast and before you know it your child is a sophomore in high school. And soon the thought of paying for college will cross your mind. The good news is that there is several college saving plans at your disposal to choose from. The bad news is college will still be expensive but don’t worry time is on your side if you plan right.

Currently the United States has an average annual inflation rate of 3%. College cost currently has a whopping annual inflation rate of 6%. That is outrageous!!! College is expensive enough. Being that paychecks don’t necessarily keep with inflation annually, the problem of saving for a child’s education has becoming more challenging.

I have learned the rich and wealthy are able to save for a child’s future learning while at the same time receive tax breaks. Yes that’s right, you can be eligible for tax breaks just by caring for your child. So let’s go ahead and dig into these different plans to save for education. And of course if you have any questions put it in the comments and I’ll do my best to answer within 24 hours.

Private Investment Accounts

This has become the most popular vehicle choice to help adults save for children’s education. It includes money market saving accounts and investment accounts. Though it is the most popular choice it is not the best choice by a long shot. It is the popular choice because lack of knowledge for other vehicles. This account can be a savings or investment account that will be used to pay for a child’s education.



Unlimited Contribution Limit Lack of Tax Benefits
Control of Assets Account Earnings are Taxed by Federal & State
Investment Flexibility  

The main disadvantage is the lack of tax benefits, as investment earnings will be taxed. The vehicle is good in the sense that there is no contribution limit, which is ideal for individuals who need to save money up in a short period. For those who have time to save I wouldn’t recommend this plan due to the sheer fact you have other saving vehicles that can accomplish the same goal and give tax breaks at the same time. If time is a huge factor it may be the best option.

Custodial Accounts

This is a savings account that the adult or guardian monitors until the child becomes of age (18 or 21 years old depending on the state). The account is with a financial institution that does investments with the money as well to help grow the account. In addition, the account is considered an asset in the child’s name where the earnings of the account are taxed at the child’s rate (one of the tax advantages).



No Income Limit for Parent(s)/Guardian Child Controls Money When of Age
No Contribution Limits Beneficiary Can’t Be Changed by Parents
Money Teaching Tool for the Child Counts as an Asset for the Child

The unknown advantage of this account is the opportunity to educate your child on how money works and how it is invested. Raising a money savvy child is priceless in the long run. However, one concern is the account becomes property of the child when they reach 18 or 21 years old. That means the child will have access to the cash and can do whatever they see fit with the money. Yup, that child can use the money to go to college or go to KODs and blow it on Ms. Ginger. Another concern is the account is in the child’s name and considered an asset. Therefore, the child may not become eligible for financial aid since they have an asset with a certain amount of cash.


Coverdell Education Plan

This is an investment account that was established to help encourage savings for future education. The individual can setup the account for a child(s) and contribute max $2,000 annually per child. The money that is contributed is tax differed (YAY). Even more amazing the money can be withdrawn tax-free as long as the withdrawal is for approved educational purchases. From my view the plan seems fit for parents who do not have much to contribute on an annual basis but still want to receive a few tax benefits.



Tax Free Distributions (educational purchases) for primary, secondary and higher education Mandatory Distribution at Child’s Age of 30 Years-Old
Tax Deferred Investment Earnings Low Contribution Limit
Control of Investments Participation Income Limit for Parents

The Coverdell Education account is an ideal account for parents who want to save for their children’s future education and intend on contributing no more than $2,000 annually. That is the main disadvantage of this account. Saving $2,000 annually for 18 years will come to $36,000. In addition to the amount will be investment earnings but the total amount may be short to pay for all educational needs.

A distinct advantage that this account offers is the money can be used for primary, secondary and higher education costs. Typically other education savings accounts will only qualify distributions for higher education.


529 Prepaid Tuition Plan

This is a savings account that is essentially a contract that is purchased at a specific price and guarantees to pay tuition and fees at an accredited in-state college or university. To make that a little bit simpler, the account is buying in-state tuition cost at the present time. Instead of paying for higher tuition cost in the future a participant is now able to buy at the current tuition cost.



Tax-Free Earnings Withdrawal for Educational Costs Scholarship Will Pay First, Then 529 Plan Will Pay the Remainder
Keeps Up With Inflation States May Have Age & Grade Requirements
Flexible College Plan No Control of Investment Planning

Overall the 529 plan can be used by any type of individual that has the discretionary income to save. It is a great savings account that offers federal tax write offs and in certain states will offer tax deductibles. To go further in detail for the third advantage, the plan pays for in-state tuition rates only. For example: Max Eisenhardt has a 529 Plan for his daughter Anya. The plan is in the state of Florida and Anya goes to a college in Georgia. Though the cost may be higher in Georgia, the 529 plan will only pay Florida in-state tuition for Anya. The difference has to be covered by other means.



Before there were 529 plans and ESAs, trusts were popular savings vehicles to save for a child’s education. Trust accounts are structured off of UGMAs and UTMAs. The accounts are considered assets in the name of the child once they reach the age of 18 of 21, depending on the resident state.



Able to spend funds on more than just college Able to spend funds on more than just college
Tax advantages to donor Beneficiary can’t be changed

Just like the custodial accounts, once the child becomes of age the account is theirs. They may use the funds to go to college or buy a car. If your child seems like the rebellious type in high school, it will be a smart idea to put them in finance classes to make sure the money is not wasted.

Always remember that you are not limited to just one account. Sometimes combinations work for people while others can only focus on one account. Others may like the idea of saving money under the mattress. The important task next is to make an action plan, find room in the budget (if you haven’t already) and execute. Speak with a financial professional to help make the best decision. Waiting to save for future college is not an easy accomplishment and shouldn’t be saved for in a year. Be proactive and your future self will thank you.


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