To CNBC’s Jim Cramer, saving for your child’s college expenses is one of the best things you can do to set them up for success.
A 529 college savings account is the most effective way to make sure your child isn’t heavily burdened with academic debt, Cramer said.
“Paying for your kids’ college education isn’t as important as providing for yourself in retirement, at least not financially,” he said. “But if you have children, then after you’ve made enough retirement contributions for the year, putting money in a 529 college savings plan should be the next item on your agenda.”
Cramer suggested parents open a 529 college savings account soon after their child is born. These accounts are not tax deductible, but once you put your money in the plan, you don’t have to pay any taxes on your gains. This way, your savings can compound tax-free over the years, similar to a Roth IRA.
Parents can front-load five years’ worth of contributions without facing federal gift tax laws, Cramer added. If you have the means to do so, front-loading into a 529 can maximize earnings by the time a child turns 18. If a child doesn’t end up using all the money in the 529, it can be transferred to another relative.
“By the way, if you save all this money and your ungrateful kid decides not to go to college, you can just withdraw the money from your 529 plan, you can just take it,” Cramer said. “Although, you’ll have to pay taxes on any of your gains along with a 10% penalty.”
