Not everyone is lucky enough to have a trust fund. Students planning for college who are looking for ways to build a college fund the right way have various options from which to choose. Whichever option gets selected, it is a responsible way to save for college.
Regular Savings Account
After receiving a paycheck, the first thing to do is to choose a specific amount that is reasonable enough to save. It could be $25 or $50 depending on one’s budget. Be consistent and make sure to put money away in a special account designated for college. Keep it separately from other accounts so that there is no urge to withdraw any of the money.
The interest rate on a savings account is minuscule, about .5 percent, but the money will be safe.
At the end of the year, the bank will issue a 1099 INT. The IRS taxes the interest earned on the account. A student is exempt from paying taxes. An accountant can give more details on that topic.
College Savings Plan
A typical college savings account is called a 529 Plan. A student can get the plan via his or her state or through an educational institution. The program enables families to set aside the desired amount for future college expenses.
Every state offers a 529 Plan, but it is not the same in every state. Research the features and benefits of the program before opening up an account. The federal government offers tax breaks on the plan as long as it meets certain basic requirements.
There are certain rules to follow under the 529 Plan. Please research further to see if the intended college is eligible. When researching, ask the following question: Is your institution 529 eligible?
Students can open multiple 529 Plans in various states.
Another college savings account is Coverdell Education Savings account or an educational IRA. Parents can contribute to the account until the child is 18 years old. There are tax implications set for this account, however. The money set aside in the account is tax-deferred and can get withdrawn without any federal tax penalties only until the child turns 30 years old. After the child turns 30 years of age, the balance of the account reverts to the beneficiary. If the account earns interest during that period, it will be taxed, and a 10 percent penalty will be accessed.
UTMA or UGMA Accounts
A UTMA is a Uniform Transfers to Minors Act, and a UGMA is Uniform Gift to Minors Act. They are both custodial accounts. They allow parents to set up accounts in their child’s name. Parents can transfer money to the accounts on a per-child per-year basis. It is advisable to check with one’s tax advisor before setting up such an account.
The parent will have control of the account, which means that the parent can withdraw money from the account.
Set up an investment account specifically for educational purposes. Purchase Zero Coupon Treasuries. Another name for it is STRIPS (Separate Trading Registered Interest and Principal Securities). STRIPS are non-callable, and they get backed by the U.S. Government. Simply put, they cannot be redeemed or called until they fully mature. STRIPS are available for purchase from financial institutions and government securities brokers only. Interest on STRIPS gets taxed in the year the interest gets earned.
Series EE Bonds
This investment option is also safe, and it is long-term. The bonds get issued by the U.S. Treasury, and they earn more interest than a regular savings account. Guaranteed by the U.S. Treasury, Series EE bonds that get purchased after May 1st, 2005 will get doubled after 20 years. The investor would have to have a substantial amount of money invested to cover college expenses.
In conclusion, students can start a regular savings account to invest for college. Alternatively, they can set up a college savings plan such as 529 Plan, an Educational IRA account, a UTMA or UGMA Accounts, or a Series EE Bond. All choices given are responsible and safe choices.