A college education is a dream for many people, but funding the dream proves to be a difficult puzzle to solve. According to the College Board, the average college fees and tuition stand at $9,000 per year for public universities up to a whopping $31,000 or more at private universities.

If multiply these figures by the minimum 4 years required to get a bachelor’s degree, and the overall cost can seem impossible to cover. Don’t forget about transportation, food, and housing, in addition to other costs.

As college costs rise every year, it’s important to get ahead of the pack by saving for your kid’s college education. To help you in this journey, here are various options you can consider.

Roth IRAs

While Roth IRAs are associated with retirement savings, many parents don’t know they can use this method to fund their kids’ college education. The truth is, it’s possible to save for your child’s higher learning to use a Roth IRA.

This method allows parents with two advantages. For those who may be behind on retirement contributions, but are stable financially, a Roth IRA is a great way to save for college costs.

The Pros

  • Roth IRAs offer investment flexibility: Different from 529 plans, which have a few investment opportunities to choose from, Roth IRAs provide you with multiple investment opportunities such as ETFs, stocks, bonds, mutual funds, REITs and CDs among other investments.
  • Enjoy tax and penalty-free withdrawals: As your savings accrue interest, you won’t have to worry about paying taxes on the interest earned if the account has been active for the past at least 5 years and if distributions begin when you are at least 59 ½ years old. You can, therefore, withdraw the funds without fear of penalties or taxes since the contributions originated from after-tax money.
  • Tax-Deferred Growth: All contributions toward Roth IRAs are after-tax earnings. This means all growth resulting from the contributions will not face any taxes but only if you satisfy all conditions. This includes having an active account for more than 5 years and being more than 59 ½ years. With this, you can access your funds at any time while the balance continues to grow.

The Cons

  • If you’re over 50 years of age, the contributions are capped at $6,500 while those below 50 the cap stands at $5,500. As you may have noticed, both limits are lower compared to other college savings plans. In some instances, your child may not qualify for this aid.
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Coverdell Education Savings Account (ESA)

Previously referred to as the Education IRA, the Coverdell Education Savings Account was put in place by the federal government with the aim of helping families save for college education. Similar to the Roth IRA, the contributions toward this account are tax-free but with only one condition: Use the funds for college purposes alone.

You can use brokerages and other financial institutions to open a Coverdell account, and all contributions will occur without any deductions. The best part about this account is that corporations can contribute toward the account.

The Pros

  • Coverdell accounts allow you to buy multiple investments and enjoy tax-free growth.

The Cons

  • The account has a low limit with contributions capped at $2,000 per year, and the funds will only be available to the beneficiary when they hit 18.
  • Once the beneficiary hits 30, all assets must be disbursed, but that requirement will be exempted if the beneficiary has special needs.

A 529 Plan

This is by far the most common plan used in saving for college. Less than five years ago, a mere 15 percent of Americans used this plan. Today, this figure is above 33 percent, translating to an amazing 120 percent growth, according to Fidelity.

There are two types of 529 plans. It’s important to understand both before saving:

  • The Savings Account – With this account, you can make after-tax contributions, which means they’ll enjoy tax-free growth as well as tax-free withdrawals. The money can only be used to fund college-related costs such as books, residence, and tuition. Anything outside this, such as living expenses, will attract tax and a 10 percent penalty.
  • The Prepaid Tuitions Plan – With college costs on the rise each year (at least 5% per annum), this plan allows for advance college-fee payment. This way, you’ll avoid future increments in fees. For example, you can pay for 10 semesters using today’s fee structure. That way even if fees hike in the future, you’ll still be eligible for 10 semesters at the rate you already paid.

The Pros

  • Enjoy tax-free growth.
  • You can change the beneficiary of the funds at any time in the future or even designate them to yourself.
  • Higher contribution limits. Often, they don’t come with any age restrictions or income limits. The limits will differ from one state to another, but you can contribute up to $300,000 in lifetime savings.
  • The account will be deemed a parental asset if the parent holds the account.

The Cons

  • The 529 plan only allows holders to use the money for educational purposes. Therefore, if the beneficiary lands a scholarship or decides not to attend college, the funds will not be available for any other purpose. If you do use them in other ways, then prepare to pay a 10 percent penalty and pay the taxes on the asset’s growth.
  • Also, exposure to the stock market can impact the returns, should the market experience a downfall. This may affect the beneficiary, especially if they are close to needing the funds. Therefore, it’s important to monitor the overall risk.
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A Savings Account

Sallie Mae says that up to two-thirds of Americans use the normal checking or savings account to save money for their kid’s education. In order to save, you can open a savings account with a credit union or bank.

With a regular savings account, you’ll have full control of the account and other contributions related to the account.

The Pros

  • There are no limits to the amount of money you can contribute.
  • Your earnings will not limit the amount you can contribute to.
  • You have absolute control of the account. That includes freedom to make withdrawals at any time.

The Cons

  • The growth on the savings will be subject to tax every year.

UGMA/UTMA Accounts

The Uniform Gift to Minors Act and the Uniform Transfer to Minors Act are both custodial accounts, which means the parent has full ownership of the account, including all assets associated with the account.

The account will be in the custody of the parent until the child reaches 18, although the age will differ from one state to another.

The Pros

  • Since the account is deemed a child’s account, part of the contributions will not be subject to tax while the remainder will be taxed at a child’s rate.

The Cons

  • Partial taxation of the contribution will be at the parent’s rate, which doesn’t happen in a 529 plan or Coverdell ESA.
  • As a parent, you’ll only hold partial account custody. After your child hits the legal age, you must transfer the account. This comes as a drawback because there’s no way of controlling how your child will spend the money.

A good number of parents takes student loans and other those with good or good average income tries to take some good investment plans to save for their child’s education. However, for the lower-income group, there any many personal funding options available. Realistic loans can help to locate available choices for parents either of lower-income or not with a good credit score. These can be used for multipurpose along with child’s studies.

There you go. Some of the best ways to save for college education. Don’t wait until your kid receives an admittance letter to start looking for funds. Chances are you’ll come short, and that means killing your child’s dream of a college education.