It can cost more than $100,000 for one person to gain a college or university education. This thought alone can make all parents nervous. In today’s world getting a college education is important which is why parents need to sit down when their child (or children) are young and figure out how best to come up with the money they will need to send their kids off to college.
Often combining one or two financing methods works best for most families. If there are any methods that are tax-deductible for you make sure to consider those from the very start. Here we look at some of the methods of financing that are available to you.
A Roth IRA is a good choice as a form of investment if you will be 59.5 years of age or older when your child is attending a post secondary institution. As long as you have had the Roth IRA for five years or more all of the withdrawals you make from it will be tax free.
If you will be younger than 59.5 when your child is attending college then a Roth IRA can still be of use to you. You are still permitted to withdraw the contributions you have made without being charged taxes and any type of penalties. The earnings you make from a Roth can be put towards a college education without being subject to a penalty. However in this case you will have to pay the taxes for the amount you have withdrawn. It is still worth it though.
Many parents look to state college savings known as 529 plans to pay for their child’s college expenses. These plans make it possible for you to earn stock-market returns on savings for higher education that will not be needed for many years to come. The way it works is that the contributions grow tax-deferred until the point at which the money is needed to pay for school costs. Once this happens the earnings on the account are taxed at the tax rate for the student, not at the tax rate of the parent.
However the 529 plans are meant to be used for college expenses and nothing else. If you choose to use the money for some other purpose then you may be subject to a penalty of 10 to 15 percent of the earnings you have accumulated. In other cases the penalty may be one percent of the total balance of the account. Besides the state college savings there are other kinds of 529 plans known as pre-paid tuition plans. These plans are useful when tuition rates are going up approximately 10 percent per year. However this plan limits the growth to whatever the rate of the public-college tuition increases happen to be in the state your child is attending school in
