Ditch the piggy bank - 6 ways to save for your kids’ future

Key takeaways:

• As the cost of higher education rises, it’s important to understand the different ways you can save for your child’s future.  
• You should consider different stipulations before determining which investment vehicle is best for your family. 
• With many different options, it’s critical that you meet with your banker to ask questions about which savings plan is realistic in your financial situation.

Your children’s future is likely a frequent thought that crosses your mind. What career will they choose? Will they find success? Will they be happy?

With a competitive workforce, higher education is becoming critical to success. That’s not an easy pill to swallow when prices for undergraduate tuition, fees, and room and board at public institutions rose 31 percent over the last decade, and prices at private nonprofit institutions rose 24 percent, after adjustment for inflation, according to the National Center for Education Statistics.

But don’t fret yet! There are several smart ways you can save for your kids’ future.

1. 529 college savings plan

This investment vehicle helps you save money specifically for your child’s education. It is named after section 529 of the Internal Revenue Code, and allows you to contribute money gift-tax-free. The 2019 contribution limit is $15,000. The money you contribute can be used to pay for tuition, books and supplies pertaining to your child’s education at an accredited university, college or vocational school.

Benefits include tax-deferred earnings and distributions that aren’t subject to federal income taxes. However, this plan is strictly for educational expenses, so if you’re hoping to help your child out with more than his/her education, this option isn’t right for you.

2. UTMA/UGMA investment

For more flexibility in how your child spends the money you’re saving for his/her future, you can open an investment account known as a Uniform Transfer to Minors Act/Uniform Gifts to Minors Act (UTMA/UGMA). This allows you to contribute to an account that will eventually be your child’s.

Similar to the 529 savings plan, adults can contribute up to $15,000 per person, gift-tax-free in 2019 and there is no limit on the number of people who can contribute to the child’s account.  An adult must oversee the account until the child reaches the age of 18 or 21 depending on the state where you and your kids reside. Of note, if you plan to have your child apply for financial aid in college, a UTMA/UGMA are weighed 20 percent toward the calculations.

3. Prepaid tuition plans

For those who live in these 11 states, including Florida, it’s possible to pay tuition at current rates now even if your child won’t attend school for a long time. This allows tuition for an in-state school to be covered at a lower rate.

This comes with many stipulations including that your child must be 15 years old or younger at the time of the account creation, and the plan must have at least three years participation before funds can be used. A great deal of caution should be used with a prepaid plan because it’s only of value if you’re absolutely certain that your child will attend an in-state school. For those who want to go out-of-state, there are penalty fees.

4. Brokerage account

A brokerage account is a type of taxable investment account you open with a stock brokerage firm. Once you deposit money into this type of account, you can use the money to buy many different types of investment securities. By playing the stock market, you are taking risks, but when it comes investing, risks typically result in rewards depending on the length of time you’re planning to invest. With several different options including ones that are online, be sure to thoroughly research which account would be right for you.

5. ROTH Individual Retirement Account (IRA)

While an IRA is typically used as a way to save for retirement, it can also be used to save for your child’s higher education. Generally, you can’t take money out of a traditional IRA without penalty until you are 59.5 years old with exception to a couple circumstances, one being using the money for your child’s qualified education expenses. Your kid must also be enrolled more than half-time at an eligible institution as defined by the Department of Education.

In the case of using an IRA for education expenses, a Roth IRA may be a better option because you can take any money you contributed out at any time without penalty. With this, your contributions aren’t tax-deductible, but your money grows tax-free and you can withdraw money tax-free. To avoid penalties with a Roth IRA withdrawal, the Roth IRA must have been established at least five years before the first withdrawal.

6. CERTIFICATES OF DEPOSIT (CD)

If you’re looking to capture higher rates of interest and want to save money for a longer period of time, a CD may be the way to go. You can choose a fixed or flex CD depending on your preference. Fixed CDs require you to deposit all of the funds at account opening and prevent you from making future deposits until the term is up. Flex CDs allow you to make additional deposits over the term of the certificate.

As long as you don’t withdraw the money during the term, a CD allows you to earn a higher interest rate on your money. However, you should consider interest rates before locking your funds into a certificate.

There are many ways to start saving for your child’s education. If you have more questions about the best option for you and your family, visit your local MidWestOne branch.

MidWestOne Bank does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.