How to start saving for your kids’ college

Raising kids is expensive: On average, a child’s expenses from birth to 17 are more than $300,000, according to the latest data from the Brookings Institution. And that’s not even taking into account the massive spending on post-secondary education.

A new NerdWallet survey found that 1 in 5 parents of children under 18 (20%) have not started saving for their child’s college education, but want to. Here’s how to start.

Consider opening a tax-efficient account

When choosing a college savings account, consider tax-efficient options. One of these options is a 529 account, which is specifically designed to save for education expenses. A 529 blueprint allows your savings to grow tax-free, and some states even offer a tax deduction on your contributions.

The downside of a 529 account is that if you withdraw the income for anything other than eligible education expenses, you will be penalized. You can change a 529 beneficiary to another family member, so if your child decides not to go to college, you can pay qualified education expenses for another child or even for yourself, but it there is a risk that you may not need the education funds at all. There are also limited investment options with a 529.

Another savings option is a Roth IRA, which is traditionally used as a retirement account, with income growing tax-free. Contributions to a Roth IRA are limited to $6,000 per year — $7,000 if you’re 50 or older — for the 2022 tax year. There are also income restrictions, and contributions cannot exceed the earned income. So unless your child is earning money, you’ll probably have to use your own Roth IRA to save for your child’s college.

Contributions to a Roth IRA can be withdrawn at any time, but earnings are generally subject to a penalty if you withdraw them before you turn 59½. If you made the first contribution to your Roth IRA at least five years ago, you can also withdraw qualified education expense growth. The advantage of using a Roth IRA over a 529 account is flexibility: if your child isn’t going to college, you can leave the savings in the Roth IRA for your retirement. Plus, you have more investment options.

Start storing something consistently, no matter how much

The average cost of tuition at a four-year public university in the state is $10,740, in 2021-22, according to the College Board. If your child is young, it will likely be much higher when they are ready for college. Costs will be even higher if they don’t live at home and have to pay for room and board.

It can be overwhelming to think about how much your child will have to pay for their education, but the best thing you can give your money is time to grow. It means putting money aside regularly even if it seems like a drop in the bucket and getting started as soon as possible.

Let’s say you make a first deposit of $200 and then save $50 per month from birth to 18. At the end of that period, you’ve contributed $11,000, but if you include a modest 5% return on investment, you’ll actually have saved $18,025. . It may not be enough to cover four years of college, but it has an impact. And that’s assuming your savings rate doesn’t increase.

Make a plan for extra money in your budget

Over time, you’ll likely find additional money in your budget that could boost college savings, such as a tax refund or merit increase. Child care costs will likely decrease or disappear as your child gets older, reducing your fixed expenses. Make a plan early on to use some of those funds to save more for college.

Maybe you want to put a quarter of any windfall into college savings, or you decide to reallocate funds that were previously earmarked for childcare in their 529. The details don’t matter, but you’ll want to make those plans before the money is in hand. Otherwise, the additional funds have a way of allocating themselves.

Don’t compromise your retirement for college savings

The survey found that nearly 3 in 10 parents of children under 18 who have personal student debt (29%) prioritize saving for their child’s education over education. savings for retirement. While it makes sense that parents want to avoid student debt burdening their children, saving for retirement should come first. Student loans are an option if your child needs them, but you cannot take out loans to cover your retirement expenses.

Investigate ways to reduce costs before applications begin

You don’t have to wait until your teenager’s freshman year of high school to start thinking about how to keep college costs reasonable. Talk to your child early about how much you can afford to contribute to their education and what steps they can take to limit their student debt. That could mean starting at a two-year college, choosing a public school, and applying for scholarships.

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