Whether someone just had their first baby or is adding a new member to their family, a new child can mean big changes to their family — and their finances. While parents may not be thinking about how to get their child through college 18 years from now yet, the sooner they make a plan to save for college, the easier it will be to save enough.
Here are 4 tips to kick a new baby’s college savings into gear.
1. Choose the Right Savings Vehicle
When it comes to saving for education, there are several options to consider:
529 college savings plan: A 529 plan is one of the most flexible and robust savings options. Depending on where the family lives, contributions may be tax-deductible, and the money in the account grows tax-free with tax-free distributions if spent on qualified education expenses. And if the new baby decides they’d rather do trade school or hop into the workforce, the parents can transfer the account to another child or even to themselves for ongoing education.
Coverdell Education Savings Account: A Coverdell plan is often used as a supplement to a broader savings plan. That’s because parents can only put away $2,000 per year per child. Plus, income limits may mean some families aren’t eligible at all.
Taxable brokerage account: A taxable brokerage account uses after-tax money and doesn’t have any tax-favored treatment like the two options above. But what it does give parents is control over the investment. Plus, if their child decides not to go to college or gets scholarships to cover the cost, the child can use the account toward a car or down payment on a home.
2. Think About Long-Term Savings Protection
Of course, every parent wants to be there when their child walks across the stage in cap and gown. But even the best-laid plans are subject to sudden interruption. That’s why it’s critical to financially protect loved ones by getting the right term life insurance policy in place.
An inexpensive term life insurance policy can protect a child’s college savings by supplying a death benefit payout if something should happen to the parents.
3. Start Small
Sometimes new parents can’t afford much beyond diapers. That’s why it’s important to start small. Even $5 a week into a college savings account can turn into a meaningful amount by the time the little one is ready to leave the nest, as a family's savings could have 18 years to earn tax-free interest. Then, as the parents' income and life circumstances change, they can continue to increase their recurring contributions over time.
4. Ask Loved Ones to Contribute Too
Birthdays and other gift-giving holidays are an excellent opportunity to boost a new baby’s college savings. Asking loved ones to contribute to college savings will provide much more benefit to the little one than another outfit or toy.
The Bottom Line
College prices continue to rise, and there may not be an end in sight. But the one thing new parents have in their favor is time — that’s why starting to save for college early is the best bet.
Using the right savings account and protecting savings with a term life insurance policy are important first steps. Then, parents can make regular recurring contributions, no matter how small, and ask loved ones for help. By attacking college savings from multiple fronts, parents can ensure their little one will have the financial support they need for college when the time comes.
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