6 Steps to Start Saving for Your Child’s Education

6 Steps to Start Saving for Your Child’s Education

6 Steps to Start Saving for Your Child’s Education

If you’re the parent of a newborn or young child, then saving for her college education is probably one of your top priorities. But it can also be daunting. The cost of college tuition right now is astronomical and it’s only going to rise. What’s the average parent to do?

As Certified Public Accountants, we wanted to share 6 steps that will help you start saving for your child’s education:

  1. Set a Goal.

The first step is to set a specific financial goal that you’d like to reach. Start by estimating what the total cost of your child’s education is likely to be. The average tuition for an in-state public school is $10,000 per year. Assuming an inflation rate of 5% per year, the cost would be about $16,000 in 10 years, and $24,000 in 18 years. Private schools may be double or triple those amounts.

But don’t let those high numbers keep you from acting. Set a goal that works for you. For example, you may choose to fund half of your child’s education yourself and use loans, financial aid, and scholarships for the rest. Or, you can set a few short-term goals, like saving 25% of your total in 5 years, and 50% in 10 years, and so on.

  1. Know Your Investment Options.

Savings accounts and money market accounts won’t provide enough interest to help you meet your goal. Some of the best investment options for college savings include:

  • Roth IRA: If you’ll be 59½ when your child is in college, a Roth IRA may be an attractive investment vehicle because the withdrawals will be tax-free. But beware of hefty fees that come with withdrawing funds if you are younger than 59½.
  • Coverdell Education Savings Account: While contributions to a Coverdale ESA aren’t tax-deductible, withdrawals are tax-free when used for qualified education expenses. However, there is a low limit on annual contributions. Also, you may be ineligible for a Coverdale ESA if your income is too high.
  • State College Savings Plans: Also known as 529 plans, contributions to these plans grow tax-deferred until the money is used to pay for college. If the money isn’t used for qualified education expenses, however, there can be a penalty. On the plus side, there is no annual contribution limit in most states.
  • Pre-Paid Tuition Plans: These state-run plans are attractive because they typically have a healthy rate of return, but they also have some major limitations. First, the invested funds can only be used at in-state public universities. Second, the funds can only be used for tuition and fees (not dorm rooms, books, meal plans, etc.). Using the money for an out-of-state college or non-approved purposes will trigger penalties.
  1. Start Saving Now.

Start saving for your child’s education as soon as possible after he is born—at least in the first 12 months of his life. As with any other investment, the earlier you start saving, the easier it will be to meet your goal.

  1. Save Regularly.

Be sure to contribute a set dollar amount every month to take advantage of dollar cost averaging and compound interest. Use your bank’s online bill pay feature to set up contributions on the same date each month. Or, have your investment house automatically withdrawal money from your checking account each month.

  1. Know When to Cash Out.

When your child is a sophomore or junior in high school, withdraw enough money to pay for her freshman year and put it in a low-risk account like a money market or an interest-bearing checking account. Then, when she’s approaching the end of her freshman year at college, you can withdraw funds to pay for her sophomore year, and so on.

  1. Work with a CPA.

Before you make any decisions about how to fund your child’s college education, you may want to consult with a CPA like one of the experts you’ll find at Tobin & Collins. A CPA will offer guidance on funding options, monitor investment performance, and recommend a smart withdrawal strategy.

Saving for your child’s education may not be easy, but it’s not impossible either. If you find the right savings vehicle and start saving early, then you can provide your child with the education you want him to have.

For over 50 years, Tobin & Collins has provided accounting, tax, and business support services to clients in the New Jersey and New York metropolitan area. Our exceptional team of professionals provides personal service to ensure we resolve each client’s financial challenges and provide sound financial strategies that puts clients on the path to future success. Contact Tobin & Collins today.