How Parents Can Prepare for Retirement and Their Children’s Education

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Contributor Rick Pendykoski outlines five financial plans and strategies to consider for themselves and their children’s education

Rick Pendykoski | August 31, 2018 | SmallCapPower: Parenthood brings forth a number of responsibilities — securing your child’s educational future being one of them. And if you are planning to retire early, then there is all the more reason to ensure that the future of their education is secured. Regardless of whether you live comfortably or paycheck-to-paycheck, you need to be smart about your financial choices and decisions.

You cannot compromise on your child’s education and, ideally, you must start saving a year before your child is born. As young parents, you must consider all the potential options and techniques to save money for the child’s future education expenses. There are different ways to save for school costs and each saving technique has its own pros and cons. Start from the basics and don’t leave anything to chance. Read on to know more.

Saving Tips for Parents

Never underestimate how much planning you would need to save money for your kids’ education. Have a clear idea of how much you must save in order to have a comfortable amount of money in the future. Discipline is very important when it comes to both retirement planning and saving for your kids’ education, so be regular with your contributions.

Do not take money out of the retirement and education fund unless it is absolutely essential. Keep the education and retirement savings separate and balance the division of money in all the accounts equally.

5 Financial Plans and Strategies to Consider

529 College Savings Plans:

In this, you can open an account on behalf of the beneficiary and invest money that grows tax-free on it. You can withdraw this money tax-free, as long as you use it to pay for qualified higher education expenses. There will be a tax-free growth of your savings and numerous states offer a state tax deduction as well. If the beneficiary doesn’t go to college in the future, you can transfer the account to a different beneficiary in the same family.

Roth IRA:

In a Roth IRA you can take out tax-free and penalty-free contributions if you have owned this account for at least five years. The penalty would be waived if you want to withdraw money for educational purposes before the age 59-1/2.

The range of investment options in this option is much greater than a 529 plan. If you don’t need the money for college costs in the future, you can reallocate these funds and continue with retirement savings.

American Opportunity Tax Credit:

This is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. The maximum annual credit amounts to $2,500 per eligible student and if the credit brings the amount of tax you owe to zero, then you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

Coverdell Education Accounts:

You can put up to $2,000 per year into the Coverdell account. You will have to pay tax on the amount when you contribute but the distributions, including all the earnings, are tax-free as long as you use the money for qualified education expenses. You can also use Coverdell money to pay for expensive private K-8 or high schools, unlike 529 plan distributions which must be used for college only.

UGMA/UTMA accounts:

Uniform Gifts to Minors Act and Uniform Transfers to Minors Act (UGMA/UTMA) accounts allow you to gift securities and other assets to minors. If you are really wealthy, you would enjoy the benefit of shifting some of your wealth to younger relatives. You also get the ability to split the income with your child, but it’s limited due to the kiddie tax.

Remember that it is never too late to start saving. Don’t regret not starting soon enough, contributing more towards retirement savings and college savings, not purchasing life insurance or not contributing more to an emergency fund. Choose the best available retirement plans for students and select a financial plan that suits your requirements perfectly. After all, you deserve a comfortable retirement without worrying about the kids’ education!

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