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8 Ways to Save for Your Child's College Education

8 Ways to Save for Your Child's College Education

If you're looking into ways to save for college, here are some options: – Open a 529 plan. – Put money into eligible savings bonds. – Try a Coverdell Education Savings Account. – Start a Roth IRA.

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8 Ways to Save for Your Child's College Education

– Put money into a custodial account. – Invest in mutual funds. – Take out a permanent life insurance policy. – Take out a home equity loan.

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Open a 529 Plan

You're probably familiar with 529 plans. The savings plans, usually sponsored by state governments, encourage saving for future education costs.

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Open a 529 Plan

They often are tax-friendly, in the sense that many states will let you deduct your contributions from your state income tax – and when you withdraw the money for college, the money won't be taxed.

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Open a 529 Plan

You can put money into your own state's 529 or any other state's plan. So if you live in Idaho but like Indiana's plan better, go for it. But open up an account sooner rather than later.

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Open a 529 Plan

"It's never too late to start saving for education, but we do encourage parents to start saving when their children are young.

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Open a 529 Plan

The more time the account has to grow, the more money kids will have available when they need it for education," says Laura Morgan, vice president of communications, savings and legal affairs at College Foundation Inc., the nonprofit umbrella organization which oversees North Carolina's NC 529 Plan.

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Open a 529 Plan

It often doesn't require much money to get started. In NC 529's case, Morgan says you can open an account for $25.

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Open a 529 Plan

The important thing, of course, is to keep contributing money to your child's 529 every year and preferably every month. Otherwise, the interest on that $25 isn't going to amount to all that much over the next 18 years.

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Put Money Into Eligible Savings Bonds

You can buy savings bonds digitally from the Treasury at TreasuryDirect.gov. They're no longer issued in paper form.

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Put Money Into Eligible Savings Bonds

"If you redeem them and use the money to pay for higher education, excluding room and board, you can exclude the income from their annual gross income for tax purposes," says Ryan Eyerman, an accredited asset management specialist and financial advisor at E&M Consulting in Strongsville, Ohio.

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Put Money Into Eligible Savings Bonds

"This is, of course, subject to certain restrictions," Eyerman adds. Some of the advantages of putting money into savings bonds is that they're guaranteed by the government and extremely low to no risk.

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Put Money Into Eligible Savings Bonds

On the downside, the interest you'll earn is pretty low. Currently, individual Series EE savings bonds are earning an annual fixed rate of 0.10%.

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Try a Coverdell Education Savings Account

A Coverdell Education Savings Account, known as an ESA, is "a tax-deferred trust account that can be used to pay for elementary, secondary and higher education expenses – room and board is permitted," Eyerman says.

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Try a Coverdell Education Savings Account

"Earnings accumulate tax-free, and distributions are free of income taxes as long as the funds are used for educational purposes." Eyerman adds: "All funds must be used by age 30, or there may be tax penalties."

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Start a Roth IRA

But wait, isn't a Roth IRA for retirement? Typically, yes, but it doesn't have to be, according to Laurence Namdar, a financial planner and the founder of Asher Levi Financial, a registered investment advisory firm in Holly Hill, Florida, a suburb of Daytona Beach.

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Start a Roth IRA

"A Roth IRA is an excellent vehicle for many taxpayers to invest after-tax dollars while shielding earnings and future growth from taxes forever, as long as appropriate distributions are made," Namdar says.

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Start a Roth IRA

As with any investment, consider the pros and cons carefully – for instance, other relatives can contribute to a 529 but not a Roth IRA. If you have one, you'll obviously want to discuss this with your financial advisor.

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Start a Roth IRA

But one big selling point, says Namdar: "With a Roth IRA, should a child decide not to attend college, the parents already have those funds invested for their retirement."

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Put Money Into a Custodial Account

Custodial accounts are savings accounts also called UGMAs and UTMAs (Uniform Gift to Minors Act and Uniform Transfers to Minors Act). They hold virtually the same assets, such as cash, stocks and mutual funds, but UTMAs can also hold physical assets like real estate.

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Put Money Into a Custodial Account

There's no limit in how much money you can put into a UGMA or UTMA, but this option is best with a child whom you believe is responsible. Your child will legally be able to use the money in the account – for college or anything else – when he or she turns 18.

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Invest in Mutual Funds

There's no limit on what you can invest, and of course, the money doesn't have to go toward college. But what you earn will be subject to annual income taxes, capital gains will be taxed when shares are sold and the mutual fund's assets can reduce financial aid eligibility.

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Take Out a Permanent Life Insurance Policy

This is a college savings plan strategy typically used by high-net-worth families to provide tax-advantaged savings for multiple goals, including higher education, according to Bryan Bentley, a financial advisor with Talon Wealth Management based out of Roseville, California.

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Take Out a Permanent Life Insurance Policy

A permanent life insurance policy is a conventional life insurance policy, but some of the money from your premium goes into the death benefit, and some of the money goes into a tax-deferred savings account.

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Take Out a Permanent Life Insurance Policy

One of the pluses of doing this, Bentley says, is that the money you save "can be accessed at any time for any reason, so it is not limited to college expenses. It provides additional benefits such as a death benefit, and other living benefits, and there is no adverse impact if it is not used for education expenses."

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Take Out a Permanent Life Insurance Policy

He adds that the life insurance policy doesn't count as an asset when you're applying for financial aid. Is it a good idea to take out a permanent life insurance policy? It really depends on each family’s financial situation, according to Bentley.

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Take Out a Permanent Life Insurance Policy

Rafael Rubio, president of Stable Retirement Planners in Southfield, Michigan, agrees that using permanent life insurance to fund a child’s college education may be a great idea. “Life insurance gives you more flexibility than 529 savings plans,” he says.

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Take Out a Permanent Life Insurance Policy

Still, there are downsides of using life insurance to pay for college, Rubio says. "The fees inside the policy can eat away the earnings, and it could take a long time for that cash value to surpass the premiums you pay," he says.

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Take Out a Permanent Life Insurance Policy

"Thus, it might not make sense to use life insurance to fund your child’s college expenses.” Rubio sees some other downsides.

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Take Out a Permanent Life Insurance Policy

“Also, some life insurance policies are reliant on the market indexes to perform. A bad run of market returns can doom the intended use of the life insurance policy, much like a 529 plan,” he says.

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Take Out a Home Equity Loan

Taking out a home equity loan to pay for your child’s education sounds risky, and it can be. It may also work out well. "This is a common approach, whether intentional or not," Bentley says, and it should be noted that he isn’t necessarily for or against the idea.

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Take Out a Home Equity Loan

"The equity in a family's home is often their largest asset, so it is often used to cover college costs,” Bentley says.

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Take Out a Home Equity Loan

“Some families will choose to pay down a mortgage instead of creating a separate college savings plan with the intention of tapping the equity if financial aid or scholarships do not materialize."

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Take Out a Home Equity Loan

As a college fund, it's not really the best option – especially if you still have years in which you could be saving money for future education costs. But if you haven't saved enough and are looking for a way to pay for tuition, not to mention room and board, it may work out.

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Take Out a Home Equity Loan

But that's why you want to start early – so you don't have to take out as many loans. And as with any investment, but especially with college savings plans, it's always best to begin putting aside money as soon as you can.

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