The Child Tax Credit, which has existed for over two decades, was recently expanded under the American Rescue Plan from $2,000 to $3,000 (children 6-17) or $3,600 (children under 5) per child, depending on a family’s income. Nearly 40 million households are expected to receive this money, which is leading many of them to wonder: what can I do with it? One option is to open or continue funding a college savings plan for your children.
The child tax payments can be used to start a 529 college savings plan or something similar. 529s are easy to set up and not typically subject to state or federal taxes when used to pay for qualified education expenses such as college or trade school, room and board, books, etc.
Investing even a portion of the tax credit will go a long way toward providing for your children’s education and future financial freedom. For example, if you invested $100 a month from the child tax credit payments and assume a 5% annual return rate, you could save over $35,000 before your child goes off to college. Or, for another example, say new parents invested the full $3,600 from their first year and never made another contribution; assuming that same 5% return rate, they’d still have nearly $9,000 saved by the time the child went off to college.
A great use for the child tax credit is investing it back in your children through a college savings plan.