According to the Urban Institute, 30% to 40% of college students take out federal loans to cover their expenses. Bachelor’s degree seekers from the class of 2023 borrowed an average of $29,374. What if you could help your college student earn a degree and get a head start on their retirement savings, all while minimizing their debt burden?
Financial coach Marc Russell, founder of BetterWallet, has a blueprint for getting your kids off on the right financial foot when they reach adulthood — and the sooner you start, the better off they’ll be. Here’s a quick overview of Russell’s simple blueprint for setting your kids up for life.
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Now: Contribute To a 529 Plan
Russell recommends opening a 529 plan for your child as soon as possible and contributing at least $100 monthly. A 529 plan is a flexible, tax-advantaged way to save and invest for education expenses.
Let’s say you start an account with $100 when your child is born and add $100 monthly for 18 years. If your investment earns a 6% annual return, you’ll have around $39,000 to help your child pay for college. Even if you can manage only $50 a month, you’ll still have more than $19,000.
If your child is just four years away from college, consider this: With an initial deposit of $100 and a 6% annual rate of return, investing $200 a month could add up to nearly $11,000 by the time they start their freshman year.
While $11,000 might not cover the full cost of college, remember that a 529 plan also offers tax benefits. The money you contribute grows tax-free, and you won’t owe taxes on withdrawals if you use the funds for qualified college expenses.
Most states with a state income tax offer a tax break for 529 plan contributions. For example, married couples filing jointly in New York may qualify for up to a $10,000 state tax deduction, and single tax filers may be eligible for up to $5,000.
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Later: Start a Custodial Roth IRA
The second phase of Russell’s blueprint involves opening a custodial Roth individual retirement account in your child’s name. This type of account lets you manage the funds until your child reaches the age of majority, which varies by state — 18, 21 or 25. The money grows tax-free, and qualified withdrawals in retirement are also tax-free.
To qualify, your child needs to have earned income, such as from a part-time job. If you’re a business owner, consider hiring your child as a W-2 employee, as Russell recommends. Pay them a reasonable wage, and be sure to follow your state’s labor laws regarding age and hours worked.
In 2025, your child can contribute up to $7,000 to an IRA. If you hire your child at age 12 and they contribute $7,000 to their Roth IRA each December until they turn 18, they’ll enter adulthood with a balance upward of $42,000 — in addition to the appreciation of the value of their investments and compound interest.
Russell points out that having an established Roth IRA may also help your child become a homeowner. A first-time homebuyer can use up to $10,000 for a down payment without an early withdrawal penalty.
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This article originally appeared on GOBankingRates.com: Finance Influencer Marc Russell’s Blueprint for Setting Up Your Kids for Life
