If you’re saving for your child’s college education, you’re not necessarily locked in to a 529 plan. Matt Becker offers four alternative saving options for college.
Often, the parents I work with feel a tremendous amount of pressure to save for their children’s college education.
It’s a great sentiment. They genuinely care about providing their children with all the opportunity in the world, and they want to be prepared for the rapidly increasing cost of tuition.
In other words, they’re being responsible, caring parents.
But there are downsides to those accounts, too, such as extra taxes and penalties when the money isn’t used for higher education. And unless you’re contributing a large amount of money early in your child’s life, the tax benefits may not even be all that significant.
Besides, contributing to a dedicated college savings account is far from your only choice. There are other options that can be more affordable, and can provide your children with even more opportunity.
Here are four alternatives to consider when saving for college.
1. Contribute to a Regular Investment Account
A regular investment account doesn’t offer any particular tax breaks, but it does have a few significant advantages.
The biggest is that the money is available to invest in your child in any way you’d like, at any time. If your son develops a strong interest in music, art, science, or a particular sport, you can use the money to help him explore it more deeply. If your daughter has an idea for a small business, you can use the money to help fund the initial costs to get her started.
The main point here is that college is only one way to invest in your child’s future. There are many other opportunities to nurture their interests and help them build valuable life skills, and having money in a regular investment allows you to take advantage of them.
And more broadly, this can be accessed at any time for any financial need. Given that goals and circumstances can change quickly, that’s a feature that provides your family with a lot of flexibility and security.
2. Invest in Travel and Experiences
Spending money on experiences like travel is not only one of the best ways to promote general happiness, it’s also a fantastic way to expand your child’s horizons and open her eyes to new possibilities.
We all tend to get a little stuck in our daily routines and the conventions of the world that immediately surrounds us. And that can be limiting.
By purposefully exposing your child to other people and cultures, you help her shed those limitations and find more opportunities to pursue a life that’s both meaningful and fulfilling.
3. Help Your Child Fund a Roth IRA
A Roth IRA can encourage your child’s work ethic and gives her a fantastic head start toward her financial independence.
First, encourage her to get a job or start a mini business. Maybe even provide a little money to help her get going, especially if she wants to start her own venture.
Then agree to match some percentage of her income with contributions to a Roth IRA in her name.
This encourages your child to learn how to create her own financial resources while also providing her with a fantastic head start on her savings.
It’s also an opportunity to teach her the basics of investing, and maybe even for the two of you to learn together!
4. Share the College Responsibility with Your Child
Sharing the cost of education is a strategy I learned from one of my clients.
Instead of paying for his children’s entire college education, here’s what he’s planning on doing:
- Funding 100 percent of the first year of college, contingent upon certain grades being maintained.
- Funding 50 percent of the second year
- Funding 25 percent of the third year.
- Funding 0 percent of the fourth year and beyond.
His reasoning is that he’s giving them the best start possible by allowing them to enter school without any financial responsibility.
But from that point forward they will have to find ways to pay at least part of their own way through. This gives them ownership over their college education and forces them to get resourceful about how they use their time and resources.
This kind of approach can make college more affordable for you as a parent and help your child take her education more seriously by building skills she will need as soon as she’s out on her own.
There are Many Ways to Invest in Your Child
When you have kids, opening a college savings account often feels like an urgent priority. While college savings accounts like 529 plans can be incredibly helpful in the right circumstances, they aren’t your only option.
Think about the type of person you’d like to raise, the kinds of opportunities you’d like to present, and feel free to get creative about how you provide them.
It may be that taking an alternative route is actually better for both you and your child.
Matt Becker is the founder of Mom and Dad Money, a fee-only financial planning practice dedicated to helping new parents build happy families by making money simple.
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While Society of Grownups hopes the information is useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner.