As a parent, one of your hopes and dreams for your child is to see him/her graduate from college. That may be easier said than done. Over the past two decades college costs have been continually rising and they are expected to continue rising even more in the coming years. If college costs continue escalating at the present rate it is projected that by the year 2033 tuition will cost on average slightly above $250,000 for four years in private universities and about $150,000 for the public ones. This means parents need to start saving money for their kids early in order to afford higher education in the future.
Luckily, there are several tools and savings plans that parents can use to pool money for their children's higher learning.
A Registered Education Savings Plan (RESP) is a plan that uses direct government assistance to help parents save more money for their children's future. RESPs, such as Knowledge First Financial, are tax-sheltered which means that all deposits made cannot be subjected to any form of taxes whatsoever. This is to inspire parents to make more deposits and increase their savings amount. The government also matches all contributions made to an RESP with 20% grants, contributing a maximum of $500 a year. In a lifetime, parents can expect up to $7,200 dollars from the government for deposits that are equal to or greater than $2,500 per annum. This is one of the highest returns on investments for savings available for parents more so since the money is not taxed until the date of withdrawal.
2. Prepaid tuition plans.
A prepaid tuition plan is a savings plan that allows parents to pay for future college education at the current price and rate as in-state public colleges. Under this plan parents purchase tuition credits at the prevailing rates. The credits can only be used at a much later date when their children have become of age and college costs are thus undoubtedly more expensive. One major benefit of prepaid tuition is that these plans are guaranteed by the state which means parents can rest easy knowing they can cash in their credits any time in the future. The plans also comes with tax advantages that benefit the parents in alleviating the huge expenses associated with college. The major downside is that they can only be redeemed at selected schools. They also do not cover accommodation. Nonetheless, they slash the college burden significantly.
3. Roth IRA
This is a special retirement account that is only funded with income after tax deductions and can only receive sums up to a specific amount each year. Once the amount has accumulated considerably any withdrawals that comply with the regulations of the revenue authority are processed tax free. Parents can set up this account for the purposes of saving for their children's education. The account is highly beneficial in safeguarding funds against future rises in taxes. The money can accumulate for decades in the account tax free which will ultimately lead to a significant increase in the amount held especially if the account holder is in a higher earning and tax bracket.
4. UTMA and UGMA accounts
UGMA - Uniform Gift to Minors Act and UTMA - are custodial accounts that allow parents and other donors to gift money to a minor who in turn owns the money but the custodian (usually a parent) manages and controls the account. It was established as a way for minors to own securities without the need for an attorney or a trustee. Perhaps the greatest benefit of this account is the low tax rates. The monies in the account are considered the child's income and are taxed the child's rate. This is true for all children who are yet to attain the age of trust termination.
5. Education savings account
This is an account that allows parents to grow their contributions for their children's education in many forms e.g mutual funds, cash, stocks, bonds e.t.c. In this account no federal income tax is charged on the contributions. Also, the contributions are considered to be assets which work in the parents' favor when they choose to apply for federal financial aid. Education savings accounts offer a lot of flexibility in that they not only help pay for college but cater for other educational expenses e.g. kindergarten and high school. The major downside is they are only open to families in low earning brackets and have a contribution cap of $2,000 a year per beneficiary.