Best ways to save for college for your child

In other words, if you and your child’s grandparents both open Coverdell accounts for your child, the combined contributions can’t exceed $2,000 per year. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. Options for college savings offer flexibility to contribute individually or as a family. Explore your options to decide the best way to save based on your finances and time horizon.

How we make money

• Some 529 plans offer FDIC-insured investment options, which are a good option for families who are looking to protect their principal investment within a short time period.
• With a 529 plan, your contributions grow tax free, so it’s especially beneficial if you start contributing early.
• A 529 plan is a tax-advantaged account made specifically for college costs.
• These can be an especially attractive option when the stock market is volatile, and we’re in a relatively high-interest-rate environment.
• This advisory service is geared toward wealthy individuals and their financial needs.

“If saving for education is the top priority, a 529 savings plan is the most obvious choice,” says Kristi Borglum, a CFP at the St. Louis-based Moneta Group. If there are errors on your report and you apply for a student loan or another loan product, errors will lower your credit score, leading to higher interest rates on your loans. With the current student loan debt in the U.S. at over $1.5 trillion, chances are you’ll have to take out a loan to cover part of your college expenses. With average rent currently at over $1,400 a month in the United States, having roommates to share rent and utilities is an excellent way to save money in college.

smart ways to save money for kids

Or see our round-up of the best 529 plans based on our analysis and ratings. It all came in just two months’ time − between August 25th and October 24th to be exact − with an average of $18.21 taken out on each withdrawal. The end of every year is a pretty expensive time for us, just like it is for many families.

Strategy #1: Starting a 529 plan late? Fund it with Scholarships

While money you withdraw from a 529 plan or Roth IRA must be used for qualified expenses, you can really do anything you want with the cash you invest in a brokerage. As the child approaches college age, these portfolios gradually transition away from riskier investments, such as equities (stocks), favoring more conservative options like bonds or money market funds. This strategic shift towards less risky holdings protects against volatility and market downturns when college expenses become imminent. Traditional savings accounts are a great way to save for college while still having access to your funds. They’re especially good for students, helping you set aside money from work or gifts with the intention of using it for school.

Get a head start on saving for your kid’s education:

You can adjust your investment options—but only twice a year or when you need to change the beneficiary. Although 529 plans are a tax-efficient, flexible and popular way to save for college, the right answer for you may be a combination of different accounts. It all depends on your long-term goals, the number of potential beneficiaries and your particular income and tax situation.

Tax Advantages of 529 Plans

If you’re interested in getting a brokerage account and a 529 savings plan, check out the options offered by Wealthfront, which offers individual retirement accounts, robo-advisors and 529 savings plans. A Roth IRA is typically used as a retirement account, and so there are limitations on how and when you can use the money. When you withdraw investment gains from your Roth IRA before you’re 59 and a half, you have to pay a 10% penalty fee. It’s important to understand that with a 529 plan, only qualified withdrawals are tax-free. You should only use your 529 plan to pay for qualified educational expenses.

savings plans

However, income limits may affect who can use Coverdell ESAs, and you have to stop contributing when your child turns 18. Fidelity provides a variety of options, managing four state plans — Arizona, Connecticut, Delaware and Massachusetts — as well as The UNIQUE College Investing Plan run through New Hampshire. Again, while non-residents may participate in a plan, they may want to carefully consider the tax and other benefits of using their own state’s plan. Though custodial accounts are taxable, for a child with no earned income, the amount of unearned income up to $1,350 is not taxed in 2025. The next $1,350 is taxed at the child’s tax rate, which is generally lower than the parent’s tax rate. UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) custodial brokerage accounts allow an adult to invest money on a child’s behalf.

Get the scoop on prepaid tuition plans and college savings plans and explore tips to maximize your college savings strategy. The two major disadvantages of using a 529 plan to save for college are investment flexibility and the requirement to use the money for educational expenses. You are generally limited to a selection of investments offered by your plan, and unless you use the money for qualifying education expenses, you could have to pay a 10% IRS penalty. Although savings accounts provide little in the way of growth compared to traditional stock market investments, and inflation can eat away at the account’s buying power. Tapping the accounts for non-college-related expenses with the hope of replenishing the funds later can result in a depleted college fund.

• Look at your budget, and consider if it’s possible to save some of your money.
• If you do need to take out your loans without a cosigner while in college, chances are the interest rate isn’t the best it can be.
• You can even encourage them to contribute some of their own money toward their college fund.
• Now that that’s out of the way, let’s take a look at how to invest in your child’s future.
• NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor.

College can be expensive, so saving now is a great way to set your child up for success in the future. Let’s explore some questions you and other parents may have about saving for college. Success in college savings depends on setting a realistic savings goal and being consistent. And setting up automatic monthly transfers from your checking to your savings account is one of the best ways to stay on track with your college fund planning. A 529 plan can offer tax-deferred growth on your contributions, a tax-free withdrawal of money and even tax deductions on your state taxes. And these funds can be used to pay for other closely related educational expenses such as room and board, software and computers.

Learn how to set up or contribute to a 529 plan to help a child who has lost a parent build a secure path to their education goals. There are several different ways you can choose to save for college, and the right solution for you might be one or a combination of them. Here are the five top ways to set aside money for college and what you should know about each one. If you are using an advisor-sold 529 plan, pay attention to the share class that your financial advisor recommends.

That amounts to around an average of nearly $31,000 for the estimated 17 million families participating in 529 plans. With so much money on the table and college costs ever rising, families should carefully consider how to pick the best 529 plan for their needs. Although an IRA is obviously intended for your retirement savings, it can also work well as a the best way to start saving for college college fund. There is usually a 10% penalty for withdrawing from an IRA before you reach age 59½, but you can avoid this penalty by using the funds for qualified college expenses. A 529 plan is a state-operated college savings plan, although funds from this type of plan can also be put toward tuition for any school year, from kindergarten to 12th grade. You’re allowed to open a 529 plan in any state, whether or not you are a resident.

You’re taxed on any earnings at your tax rate, rather than at your child’s. You’ll also need to keep in mind gift tax rules when you decide to turn over the account funds to your child, meaning it may not make sense to transfer all of the account’s assets at once. College costs have also been steadily rising for decades, so if you have a young child or you’re currently expecting a baby, it’s likely that they’ll need to pay much more for school.