Going to college comes with many perks, but it can be one of the biggest investments you may make for your or your child's future. In 2023, the average borrower holds $37,338 worth of student loan debt and dishes out $337 every month to keep up with payments.
It goes without saying that college expenses aren't cheap, and it'll take some advance planning and saving to avoid drowning in debt later. There are scholarships that can fill in the gaps, but that's not always guaranteed.
When it comes to saving, you can stick to the traditional education savings plans, or you can explore other accounts that give you the flexibility to save beyond college. Either way, you'll be able to put every penny to work so your future self can reap the benefits.
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Put your money to work with a 529 plan
While there are many accounts you can use to save for college, the 529 plan automatically stands out as a top contender. It's designed specifically for school, so you don't have to worry about jumping through hoops to pay for your own or a beneficiary's qualified education expenses, such as room and board or tuition and fees.
After you open and fund a 529 plan, you don't have to let your money sit in your account. You may be able to invest your money in different funds that align with your goals and risk tolerance. At the end of the year, you won't have to worry about a tax bill because the money in your account grows on a tax-free basis. But if you decide to withdraw funds to pay for nonqualified expenses, you'll have to pay a penalty, in addition to taxes on investment gains.
Grow your money in a regular brokerage
If you're a parent and you're not sure about your kids' educational goals, you may feel uneasy about putting your money in a college savings account. If that's the case, you can stuff some cash in a taxable brokerage account. That way, you can have more flexibility with your money and choose how to spend your dollars in the future.
There's also no limit to how much you can contribute to a taxable brokerage account, so your earnings potential is endless. You could buy a bunch of growth stocks, dividend stocks, or exchange-traded funds (ETFs) to jump-start your investment portfolio. You can earmark a portion or all of your investments for education, so you won't be tempted to touch the money for other purposes.
Earn tax benefits and college savings perks
Although a regular brokerage account provides flexibility to use money beyond college expenses, you won't get any tax perks at all. That's when a Roth IRA can save the day, if you qualify. You can contribute after-tax dollars -- up to an annual limit -- to your Roth IRA and enjoy tax-free investment gains and withdrawals later.
A Roth IRA may be out of reach for some because you have to meet a few qualifications, such as having earned income and ensuring your income doesn't exceed the annual threshold. But if you're eligible, it's a good way to control how your college funds are invested. You can invest in individual stocks or ETFs of your choice, and you can skip penalties when using your money to pay for higher education.
If you don't end up using all your Roth IRA funds for college, you can use the account for its intended purpose, which is retirement planning. Let's say you opened a Roth IRA for your child after they started their first summer job. If they decide later on not to use the retirement funds for college, they can keep investing the money in the account for retirement. If they happen to accumulate $1 million in the Roth IRA, they can withdraw the money 100% tax-free after they turn 59 1/2.
Make the most of your college savings
If you're saving money for your child's college education, you want to make sure you are putting your money to work. Whether you choose a 529 plan, regular brokerage account, Roth IRA, or other vehicle, it's important to weigh the pros and cons so you know exactly what you're signing up for. If you want more than one account for college savings, you can consider that as well. If your child doesn't use the money for college, they may be able to tap into the funds to get the ball rolling on other financial goals.
