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5 ways to get ahead of future college costs

The privilege of sitting in a college class costs money. Saving can range from savings bonds to IRAs to a variety of tuition programs. It takes some studying to figure out which will best suit your family’s needs.

Saving for college ahead of time is now practically a necessity since funding sources such as loans, grants, endowments and work-study programs often fall short of covering costs. The price of a four-year degree can reach upwards of $40,000, so early savings could be the key to funding post-secondary education. Five savings options that could close the financial gap include:

1. The 529 Plan (qualified tuition program)

Each state caters its own 529 savings program to the needs of its participants. Consistent deposits over a period of time — such as a 10-year period — will determine the size of the account. Accounts not only offer tax benefits but also tax-free returns. A participant can deposit $100 or $200 on a periodic basis in advance to pay for higher education.

2. U.S. Savings Bonds

Federally backed U.S. bonds are considered a secure investment. Bond holders pay no state or local income taxes on this investment, which involves offering a cash amount as low as $25 per bond. Participants can opt to defer federal income taxes on the earnings if the bonds reach maturity. Bond holders can select from three types of bonds based on interest rate and duration. Depending on bond selection, earning rates also could vary based on semi-annual inflation rates.

3. Individual Retirement Account (IRA)

Typically, IRAs are associated with savings for retirement in an account managed by a bank or an investment company; however, IRAs also can be used to pay for a post-secondary education. Advantages include more investment choices, tax deferments and non-taxable accounts. Investors can choose from three types of IRAs: traditional, Roth IRAs and Rollover IRAs. The type selected might depend on income brackets, withdrawal and tax options and employer-sponsored investment plans.

4. Borrowing against 401K

Investment experts stress those investors with 401Ks should think twice about using this method of obtaining funds for college and instead first seek other money sources to maximize the long-term benefits of a 401K program. However, if the choice is made to do so, a borrower should understand the terms of the loan. Re-payment might be immediate. Financial institutions might offer an option of automatic payroll withdrawal.

5. Custodial Accounts (UGMA/UTMA Accounts)

The Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act (UGMA/UTMA) allow individuals to offer financial gifts to children. Participants transfer property and money to minors while reducing the expense and legal webwork associated with trust funds. This type of investment utilizes banks, mutual fund companies and investment firms to handle the accounts that are considered income. Be sure to research your state’s custodial account specifications.

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