Dear Frank,
We laugh about saving for college when kids are very small. They’re little bundles of joy who simply need to be fed and clothed. Why fret about what’s going to happen 18 years from now? And then, all of a sudden, they’re not small anymore. They grow like very opinionated weeds and have their own senses of humor and points of view. And body hair.
I can imagine you’re not the only parent quietly panicking at this as you glance over your stepdaughter’s shoulder trying to decipher how they’re teaching math these days. This very far-off life event is not actually that far off.
The good news is that you’re saving. The bad news is that your money probably isn’t working hard enough for you while it waits for your stepdaughter to make some big decisions about her future.
A 529 savings plan is a solid option because it’s a tax-free investment account. But the penalty is steep for those non-educational withdrawals: a 10% penalty on top of income tax. However, it’s important to note that those funds can be used for almost any educational endeavor, and you can change the beneficiary on the account in the event she doesn’t need all the money.
Another option is a custodial account. As long as the account earns less than around $2,100 per year, the earnings are taxed at the child’s rate instead of the parents’.
This type of account can negatively affect how much need-based financial aid she’s eligible for when she applies to school. But the benefit of a custodial account as a college savings plan is that she gets control of the money when she’s 18. That can sound scary right now with a new teenager in the house, but it means that if she chooses not to go to college, she can still use that money toward her future financial security.
Every method of saving for college — from 529s to savings bonds to stuffing cash under the mattress — will have drawbacks. At this point, what’s essential is that the money you’ve already saved gets into an investment account of some sort. When the time rolls around — oh, and it’s about to roll around — you want that money to stretch as far as it possibly can.
Have a tricky money question? Write to Dear Penny at https://www.thepennyhoarder.com/dear-penny
Lisa Rowan is a personal finance expert and senior writer at The Penny Hoarder, and the voice behind Dear Penny. For more practical money tips, visit www.thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
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