Saving for a Child’s Education – What is Your Plan

It seems that no young adult is prepared to enter the workforce these days without a college degree. Eduction is one of those invaluable gifts that every parent wants to give their child, but when that child surpass 18-years-old, education suddenly gets quite expensive; especially for parents who have an aspiring Ivy-Leaguer on their hands!

So, the key is to start saving up now. Invest in your child’s future today and you won’t have mixed feelings about your child’s acceptance to Yale down the road. You’ll be thrilled and have the peace of mind that you can indeed afford for your child to get that precious college education. So what are the steps to saving for your child’s education?

The first step is to estimate the cost! Not only will there be the cost of tuition, but since your young scholar won’t have room in his or her schedule for a full-time career, you’re probably going to have to help him or her pay for housing and other expenses, unless they are staying at home and enrolling in a university online. And what about books and school supplies?

It really starts to add up. This is why the earlier you start saving, the better. So what are you waiting for? Your child isn’t getting any younger!

While higher education is not cheap, if you put away some pennies now, it won’t hurt the bank account later. Let’s talk about two savings accounts that are specifically designed to help you pay for your child’s education.

A 529 Plan

529 plans, commonly called college savings or tuition prepayment plans, are available in every state.

The money that parents put into a college savings plan account is typically invested into mutual funds, but there’s a nice twist here: there is no federal tax on it! As long as the withdrawals you make are related to education expenses, including books, etc, then you won’t have to worry about those pesky taxes. Additionally, you can use a 529 plan to fund your child’s education at any kind of university or college: whether it be private, public, or even a trade school. 529 plans don’t even expire once your high-achieving college student enters into a graduate program.

As for the prepaid tuition accounts, any family member can contribute to the balance, not just parents, and a prepaid tuition account simply grows at a fixed interest rate and thus, even as college tuition rates increase, the 529 plan will keep up.

There are limits, though they are relatively liberal, to how much a single parent or married couple can contribute to a 529 plan annually. It’s important that you research these limits.

Another thing to keep in mind is that there are risks with a 529 plan. An investment in mutual funds, even a very conservative one, is not guaranteed to be as lucrative as you might like. Another con to the 529 plan is that if your child benefits from one, he or she may not qualify for other sources of financial aid.

The Coverdell Education Savings Account

Coverdell Education Savings Accounts, or ESA’s, work much like a prepaid tuition plan, as in any family member can contribute to it. However, there are some key restrictions. While withdrawals are tax-free (when appropriately made), the contributions are not tax-deductible. As well, no more than $2,000 can be contributed each year, and money can only be contributed between kindergarten and 12th grade. However, the saved funds can be withdrawn up until your daughter or son reaches age 30.

As well, the tuitions for both a private elementary or secondary school can be cared for with an ESA.

One important note about the ESA is that there is an income requirement. If your yearly gross income exceeds $110,000, as a single taxpayer, or $220,000, as two married taxpayers, then you will have to ask another family member to contribute to the account.

There are plenty of accounts like this and of course many ways to save and invest money. The key is to invest money in an intelligent way and to start saving and investing as early as possible. But if you know you’re saving for you child’s education, why not take advantage of the great tax benefits?

But if you didn’t plan ahead, you still can avoid that financial headache. If your high school student takes advantage of the many college scholarships out there, they can sometimes manage a full ride to the university of their choice! Encourage good grades and carefully plan with your child, if this is the case. Of course, good grades should be encouraged anyhow!

So, invest in your child’s future, and ultimately America’s future, by tucking away a few dollars today. It can make all the difference. It may be challenging to save for both your retirement and your child’s education, but it is possible and it is definitely worthwhile.



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