Thursday, 12 January 2012 22:22
It may seem strange to think about saving for a college education when your child is very young, but there are two things you should consider:
· College costs go up about 5 to 8 percent each year, meaning that the cost of a college education could easily grow to more than $250,000 by the time your child is ready.
· With any kind of saving and investing, time is your ally. In fact, starting now with a smaller amount will produce greater results than starting later with more money.
Fortunately, there are some smart ways to save for your child’s education that let you begin very early. Many of them even include tax advantages!
Coverdell Education Savings Accounts
An Educational IRA gives you an excellent way to save tax-free for your child’s education. You can deposit up to $2000 a year per child, from birth through age 18. You can transfer funds from one child’s account to another child’s account. When your child begins college (or needs to pay other qualified educational expenses), he or she can withdraw the money tax-free, penalty-free.
If you haven’t heard of 529 College Savings Plans, you should learn about them. They allow you to make even larger contributions than a Coverdell Education Savings Account, and give your savings a tax-deferred way to grow. The money grows tax-free, and you won’t have to pay taxes on what’s withdrawn if it’s used for higher education at any accredited college or university in the U.S.
One of the benefits of a Roth IRA is that you can withdraw money that’s been in your account for at least five years to pay for certain educational expenses such as college tuition without paying any penalties or added taxes. (With a Roth IRA, your annual contributions are not tax-deductible.)
If you’d like to maintain control of money you’ve saved for your child (or a grandchild) until he or she becomes an adult, a custodial account may be right for you. You make all the decisions about how much to invest each year, how it will be invested, and how the money should be used. In addition to cash, you can place stocks and bonds in custodial accounts. Generally, the first $750 of earnings each year are not subject to taxes. Up to an additional $750 of earnings will be taxed at the child’s rate, and any earnings above that are taxed at the rate you pay. Withdrawals may be taxable, too.
Prepaid Tuition Plans
Many states offer plans that allow you to start paying for most or all of your child’s tuition at a public college or university while he or she is still a child. The advantage is that you’re prepaying tomorrow’s costs at today’s rates, but the downside is that the money can only be used at one of the schools covered by the plan. To learn more, contact a college or university that interests you.