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4 Smart Ways to Save for Your Child's Education

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College has never been so unaffordable for families. About 19% of students leave college with $50,000 in debt. No parent wants their child to graduate college with a mountain of debt. Even if you can't afford to save enough to cover the entire cost of college tuition, you can at least help with the costs if you start saving now.

Here are four smart ways to start saving for your child's education.

1. 529 College Plans

One of the most popular ways to save for college is with a 529 plan. More than 30 states are now offering this special college savings plan, also known as Qualified Tuition Program, or QTP.

The concept is simple:

  • You invest after-tax money into the plan.

  • You withdraw the funds – tax-free – to use towards education expenses (tuition, books, etc.).

Annual fees, contribution limits, investment options and operating costs vary from state-to-state.

Parents have the ability to change beneficiaries if needed, but if the money is withdrawn and used for non-educational expenses, the funds may be taxed.

2. Roth IRA

A Roth IRA retirement savings account offers tax advantages, and it can also be used to help save for your child's education. These accounts work in the same way a 529 plan works.

  • You contribute money to the account.

  • Gains can be withdrawn later tax-free.

Roth IRAs allow you to withdraw funds tax-free and penalty-free after five years if used for qualifying educational expenses.

The advantage to using this savings vehicle is that you can use the funds for retirement if your child decides not to go to college.

A Roth IRA account will have contribution and income limits. Single taxpayers earning more than $129,000 per year cannot open a Roth IRA. The contribution limit is $5,500 per year for people under the age of 50.

3. Coverdell Education Savings Accounts

A Coverdell education savings account provides tax advantages and the savings can be used for any qualified educational expense.

Parents can invest up to $2,000 per year, provided they don't exceed the income limits. The nice thing about Coverdell accounts is that you're in control of the investment, so there's no need to worry about risky investment vehicles.

The only drawback with this type of account is the low contribution limit of $2,000 per year. But you do have control over investments. This means that you can start off with riskier options and then go the safer route as your child gets closer to college.

4. UTMA and UGMA Accounts

UGMA and UTMA accounts allow parents to make financial gifts to children, which are held in a custodial account until the child reaches adulthood.

These accounts offer some tax benefits, but they are considered your child's assets. That means that the funds in these accounts will affect the amount of financial aid your child receives.

Because the money belongs to your child, he or she can use the funds for college or something else entirely.

One more tip: Start saving as early as possible. Many of these savings vehicles have relatively low contribution limits, which makes it difficult to save a lot of money in a short amount of time.

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