Now that their children are back in school, the day may soon come when those schools will come with a hefty price tag. I don’t want to see either, so I’m wondering how I can start saving for the day. (There’s no financial aid for that, so make sure you’re on track for retirement first.)

Fortunately, more and more employers are offering financial wellness programs to help employees save for their education. After all, more savings means fewer employees rummaging through retirement accounts to pay college bills. Let’s take a look at some of the pros and cons of some popular education savings options.

savings or investment account

This is the easiest option. This is simply a savings or investment account in your name intended to be used for your child’s education. The main advantage is that you have the most flexibility in how you invest and spend your money. The biggest drawback is that you have to pay taxes on your investment income every year. This reduces the amount available for these educational expenses.

Custodial (UGMA or UTMA) Account

One way to solve your tax problems is to open an account in your child’s name. The problem is that Congress anticipated this strategy of parents using their children as tax shelters and created the “child tax.” This year, her net unearned income in excess of $2,300 in dependent children will normally be taxed at her parents’ rates.

There are some other drawbacks as well. Money doesn’t have to be spent on education, but it has to be used for the benefit of the child, so there are some restrictions on what you can do with it. Also, 20% of your child’s name assets can count towards financial aid calculations that are much higher than money in your name. Finally, once a child reaches the age of majority in your state, they can use it however they please. It could be a college bill… or it could be a new sports car.

U.S. Government Savings Bonds

These bonds can be redeemed tax-free for eligible educational expenses, as long as you meet certain requirements, including income limits. Notably, the Series I bond currently pays 9.62%, is fully insured by the federal government, and is not subject to price fluctuations. However, that rate adjusts for inflation every six months, so it will decrease when inflation recedes. Also, the first 12 months are not redeemable, and if you redeem in the first 5 years, you lose the last 3 months of interest on him. You can purchase up to $10,000 per person per year at treasurydirect.gov. Plus, you can purchase an additional $5,000 annually with tax rebates.

529 plan

Perhaps the most popular option is the 529 savings plan. These are set by each state, but you can contribute to any state plan regardless of where you live or where your child goes to school. Some states offer state tax credits or matching funds to residents who contribute to their state’s plans. (Seven states also offer state tax credits for contributions to any state plan.)

Using a 529 savings plan has several advantages. Earnings are tax-free when used for post-secondary qualifying education expenses (up to $10,000 annually for K-12). When you open an account in your own name, up to 5.64% is counted for financial assistance purposes, allowing you to manage your funds even after your children reach the age of majority. (A 529 plan in the name of a third party, such as a grandparent, does not affect financial assistance at all.) It’s also an excellent legacy because it can give you up to five years of gift tax exemption at once. It is also a planning tool. Contributions are removed from taxable property.

The main drawback is that using the funds for non-qualifying educational expenses may result in taxes and a 10% penalty on the earnings withdrawn. There are also some outs. If your child is on scholarship, you can withdraw the amount of the scholarship without penalty. You can also use the money for someone related to your child, such as siblings or you or your spouse if someone in your family goes to school instead. There are no penalties for unimaginable events.

Another drawback is the limited investment options offered by various state plans. Financial guru Clark Howard has created a guide that he thinks is the best 529 savings plan based on your investment options and the tax breaks and deductions your state offers. Alternatively, you can purchase tuition units with a prepaid tuition plan of 529.

Coverdell Education Savings Account

This is a plan with similar tax benefits and penalties to the 529 plan and is generally treated the same for financial assistance purposes. more flexible in terms of Like an IRA (see below), you can open with a variety of low-cost institutions and invest in everything from FDIC insurance savings accounts to individual stocks. Tuition fees to private or religious schools that provide primary or secondary education, in addition to funding post-secondary education costs, and items such as laptops and mobile phones, even if they are not required by the school You can use this for

However, there are also some limitations. The largest is a total contribution limit of $2,000 per child per year from all sources. There are income limits on who can donate, but you can easily get around this by gifting money to your child or someone else to donate to your account. You need to, but if that deadline is too close to feel comfortable, you can always change the recipient to someone related to your child or roll back your account to the same child’s 529 plan. Beneficiary.

IRAs

A final option is to use a traditional IRA or Roth IRA as you can withdraw funds without penalty for eligible educational expenses. However, with the exception of after-tax Roth IRA contributions and eligible Roth earnings, you must pay taxes on the money you withdraw. Make sure you don’t need money for your retirement goals, as this will obviously reduce your retirement money as well.

If you’re still not sure which option is best for you, we recommend consulting with a qualified and unbiased financial planner or coach. (If planners make money by selling products on commission or by charging commissions on assets they manage, that could affect their advice.) Planners that charge a flat fee or see if your employer offers access to the planner for free. Workplace financial wellness program.