So your child’s just been accepted into college. Good times. They’re about to embark on quite the journey that will hopefully prepare them for the real world once they’ve graduated. Now, you’ve just got to pay for it. On average, it costs just over $35,000 to go through college, so hopefully, you already have a savings plan in place. But is it tax-deductible? That’s what we’re looking at with this guide, as well as what you need to know about saving for higher education.
When should I start saving for my child’s college?
You should really try and start saving for your kid’s college as early as possible–the earlier, the better. There’s no reason why you can’t even start before they’re born, though it’s probably not necessary to do it that early.
On average, parents aim to save $55,342 for their child’s college. If you want to reach these kinds of targets, then it’s best to start as soon as you can. Over the last five years, parents have saved $2,118 more on average than they did previously. The average saving per year is $5,143.
What college savings plans can I use?
529 account
A 529 plan is by far the most popular way to save for your kid’s college, according to the numbers. Around 30% of parents use a 529 plan to save, and they accumulate an average of $28,679 in 529 accounts. A 529 plan is an investment account designed specifically for saving towards your child’s college, with each plan varying depending on the state where you reside.
Regular savings account
There is, of course, the option of saving for your child’s college in a regular savings account or even a checking account. Some parents may also use a brokerage account. While these are perfectly viable ways to save, they don’t tend to offer any incentives, especially savings and checking accounts.
Roth IRA
While Roth IRAs are more associated with retirement accounts, they have become popular as savings accounts for college. They offer the same basic structure as a 529 plan, and college expenses are an allowed exemption from the IRS’s early withdrawal penalty.
Permanent life insurance
Another unconventional way to save for your kid’s college, permanent life insurance coverage features a cash value element that allows you to build wealth over time and access it later in life. You’re free to use the funds accumulated for whatever you wish, with some people putting the money accrued towards paying for their child’s college.
Are college savings plans tax deductible?
If you’re saving hard-earned money to send your kids to college, it would be nice to get a few tax breaks while you do it. Fortunately, with a 529 plan you can benefit from tax breaks when the money is used for qualified education expenses, such as tuition, fees, books, and other college supplies. However, should you no longer need to use the plan when your child goes to college, and you would rather use the money somewhere else, you’ll be subject to taxes plus a 10% penalty fee.
Fortunately, with a 529 plan, you can benefit from tax breaks when the money is used for qualified education expenses, such as tuition, fees, books, and other college supplies. However, should you no longer need to use the plan when your child goes to college and you would rather use the money somewhere else, you’ll be subject to taxes plus a 10% penalty fee.
A Roth IRA also offers the same basic tax structure as a 529 plan. This means you can save for your child’s education tax-free with the added bonus of being exempt if you withdraw the money early to pay for your child’s college.
Another tax-free way to send your kids off to college involves permanent life insurance. You don’t pay tax on the money you accrue via the cash value offered with a permanent policy. Unlike a 529 plan, however, you don’t only get the tax benefit when you withdraw the money to pay for higher education. Regardless of what you use the cash value for, you can do so completely tax-free.
Tell me about permanent life insurance
Gladly. With a permanent life insurance policy, you get a death benefit to leave to your loved ones as well as the chance to build wealth while you’re still alive. Therefore, the sooner you start a policy, the more money you can accrue over time. It’s why getting a life insurance policy in your 20s can be a savvy move.
When you pay into the premium (which stays at the same rate throughout the entirety of your policy), you’ll pay into two separate accounts: the death benefit and cash value. Both of these grow over time, and you can opt to withdraw the money from the cash value via a 0% loan to yourself.
Doing this means the money is tax-free, as you can’t pay yourself tax. When you pass away, the accrued death benefit covers the loan, with the rest going to your beneficiary. How you decide to spend the cash value is entirely up to you, but an increasing number of parents are using it to send their kids off to college.
In conclusion: saving for higher education
Saving for higher education needn’t be a hassle, and there are many ways to do it. Even better, you don’t have to subscribe to just one method and can easily use a combination of a 529 plan, Roth IRA, and permanent life insurance to save up enough money to send your kid to college and enjoy building wealth, especially with a permanent life insurance policy.