How exactly should you start saving for college? Don’t worry if you haven’t started yet. Whether your child is in high school or kindergarten, there is a college savings plan that will put you on the right track.
529 College Savings Plan
A 529 plan is one of the most common methods people use to save for college. Earnings grow tax-deferred, meaning there are tax advantages to these accounts. If withdraws are used to pay for qualified higher education expenses, savings in this kind of fund are free from federal income tax.
Coverdell Education Savings Account (ESA)
This saving option, which allows earnings to grow tax-deferred, can be used for qualified elementary, secondary and post-secondary school expenses, and distributions may be exempt from federal income tax. However, there are income restrictions. (College savings plans and ESAs have a lot in common, but there are key differences, too.)
Investing in mutual funds provides an opportunity for greater growth potential than fixed-income products. Mutual funds are investment vehicles that invest in a range of securities, often tracking an index. Withdrawals from mutual funds are taxed as ordinary income to the extent of the gain. Along with greater growth potential than fixed income products, like bonds, mutual funds carry greater risk.
While contributions to Roth IRAs are not tax-deductible, earnings grow tax-deferred, and qualified distributions are tax-free. Earnings used for education are not subject to the 10 percent IRS penalty for withdrawals if made prior to age 59½.
Permanent Life Insurance
Cash values grow tax-deferred in permanent life insurance. They can be withdrawn for education without impacting eligibility for financial aid. If you die, proceeds from the policy will be paid directly to your beneficiaries, who may use them toward education costs.
Your Farm Bureau advisor is your best resource to start or supplement your current college saving strategy. Talk to your local Farm Bureau agent or advisor today.