Upon discovering that we were expecting, one of the foremost concerns my spouse and I had to grapple with was financing our future child’s college education. It’s true that the financial burden of higher education, particularly in the US, can be daunting. As new parents, it’s quite unsettling to ponder about accumulating enough savings for college. Observing my peers, who have children entangled in college applications, battling against the hefty annual fees of private schools that can reach upto $50k, I can comprehend their struggles. Even public schools are not exempt from this, requiring upto $20k – $30k annually, adding considerable stress to our work life. Occasionally, we have to alter our office dynamics to prevent personal issues from taking over too much.
Belonging to a middle-income bracket, like many, we aren’t eligible for financial aid and neither can we afford the colossal college fees right out of pocket. The burden of college debt is just one of many obstacles millennials face today. It seems nearly impossible to embark on a financially secure adulthood when you commence it with a $30k student loan debt.
Consequently, we’ve spent considerable time contemplating various strategies to save for college education. The following are some of the methods under our consideration to build a robust college fund.
CUSTODIAL ROTH IRA
As parents, we can establish custodial Roth IRAs for our children with as little as $100. This enables us to deposit funds into their account even if they’re not earning. Traditional IRAs require children to have a job that earns them an income, however, with a Roth IRA, children can start contributing as long as parents approve the custodial account. This can be an effective method to educate children about the significance of retirement savings by allocating a portion of their birthday or graduation gifts to the account or using it as a college fund.
COMPOUND INTEREST
An advantage of establishing a Roth IRA for your child is the immense opportunity to reap the benefits of compound interest.
Investopedia suggests that a one-time IRA contribution of $1,000 at age 10 could burgeon to $11,467 by the age of 50 given a conservative 5% average annual growth. If a $50 monthly contribution is added to the initial $1,000 deposit at age 10, the account could swell to $137,076 by age 50.
By financially contributing towards a Roth IRA in your child’s name right from birth, substantial interest can be earned before they step into college at 18 years of age.
This underlines why opting for a Roth IRA is judicious for your kids’ college savings.
FLEXIBILITY
Parents saving for college often lean towards the 529 plan due to its greater tax advantages. However, a 529 plan must be used strictly for college savings and related expenditures. How can we be completely certain that our child will opt for college? A Roth IRA extends more flexibility as compared to a 529. In cases where we may feel overwhelmed, we are glad to have sought professional advice to worry less. With a Roth IRA, one can withdraw money for higher education expenses without incurring any tax penalty. Plus, up to $10,000 can be withdrawn for a first home down payment without the applicable 30% tax penalty for distributions before the retirement age.
This versatile saving tool serves multiple purposes. Besides providing retirement savings, it assists in saving for college education or a down payment for a house. This is surely a wonderful legacy you can pass onto your child in terms of substantial financial support at key life milestones.
