Even though your kid (or grandchild) maybe two years old, it is not too early to begin planning how you will pay for their education after high school. This price takes into account the current rate of inflation of 6%. Are you considering applying to a private university? When your infant is old enough for college, it will set you back a whopping $598,063 in total costs.

The Cost of Going to College

Bear in mind that these figures reflect the expenditures of a single year of college; the number of years that your kid will spend in college will vary depending on the degree(s) that they want to get. Many students will be eligible for financial assistance, scholarships, and grants to assist them in covering the expenses of education; nevertheless, there are many more methods to reduce the prices of college. These plans and accounts provide you the ability to save money for your child's or grandchild's education in an effective manner while also protecting those funds from the Internal Revenue Service to the greatest extent feasible.

529 Plans

According to Sam Davis, partner and financial advisor at TBH Global Asset Management. A 529 plan is a tax-smart investment plan that allows families to save money for the beneficiary's future education expenses. The payments to these plans, which are made with money that has already been taxed, are subject to very high restrictions. Each year, you are permitted to make contributions of up to the annual exclusion limit, which will be $15,000 in 2021. (the "annual exclusion" is the maximum amount you can transfer by gift, in the form of cash or other assets.

Different Kinds of 529 Plans

There are two distinct varieties of 529 plans, namely:

College Savings Plans

Your contributions to these savings programs, just like the contributions you make to other investment plans such as 401(k)s and individual retirement accounts (IRAs), are invested in mutual funds or other investment products. Most plans include age-based investment choices that grow more conservative as the beneficiary gets closer to the age at which they are eligible to enroll in college. Account profits are dependent on the market performance of the underlying assets.

Prepaid Tuition Plans

Families can secure today's tuition rate by pre-purchasing their education via the use of prepaid tuition plans, which are also known as guaranteed savings plans. When the participant in the program enrolls in one of the state's qualified educational facilities for higher education, the program makes a payment to cover the beneficiary's expected educational expenses. You have the option of transferring the amount of the account to another grandkid beneficiary or receiving a refund if the beneficiary ultimately decides to attend a private or out-of-state school.

Traditional and Roth IRAs

An individual retirement account, sometimes known as an IRA, is a kind of tax-advantaged savings account in which you may hold assets such as stocks, bonds, and mutual funds. You can choose the investments held in the account, and you are free to make changes to those selections as your requirements and objectives evolve. The payments to these plans, which are made with money that has already been taxed, are subject to very high restrictions. As a result of the SECURE Act, the age at which you are required to begin taking required minimum distributions (RMDs) has been increased to 72 years old.

Drawbacks

A few disadvantages are associated with drawing from your retirement savings to pay for your child's or grandchild's college expenses. Therefore you need to be sure that you have enough money saved for retirement, even if you don't use an individual retirement account (IRA). On the application for financial assistance submitted the following year, IRA distributions may be recognized as income, affecting the applicant's eligibility for need-based financial help.

Coverdells

To save money for your child's or grandchild's approved educational expenditures, you may open a Coverdell Education Savings Account (ESA) with a financial institution such as a bank or a brokerage business.

Cash

Because of the yearly exclusion, you are free to give away up to $15,000 in cash or other assets each year to an unlimited number of individuals. This amount will increase to $16,000 in 2022. When a married couple combines their yearly exclusions, they can contribute a total of $30,000 (rising to $32,000 in 2022) tax-free to as many persons as they want. If you are a parent or grandparent, you can make a gift to a kid each year that is up to the annual exclusion amount. This gift may go toward helping the child pay for college or other higher education fees. The lifetime exemption will be $11.7 million per person in 2021 (rising to $12.06 million in 2022). Gifts larger than the yearly exclusion will count towards the lifetime exemption.