Your kiddo is barely out of diapers -- the idea of saving for his college education seems overwhelming, even premature. You’ve got time, right? College is eons away. Think again -- the sooner you start saving, the better. Even a modest monthly savings can grow significantly over time to help prepare you for when that tuition bill arrives in your mailbox.
According to Fastweb.com, parents should base their savings goal on the cost of college the year their child was born if they intend to pay for 1/3 of the cost from savings. Make it easy by setting up an automatic transfer from your checking account to your savings plan. Over time, commit to increasing the amount. When your child no longer needs day care, redirect that money into your savings plan. Don't forget about "unexpected" money: when you get a raise, receive a bonus, or come into an inheritance, contribute some of that money to the fund.
529 Savings Account
With a 529 savings plan, you can begin modestly -- as low as $15 a month in some states -- and the savings are protected from taxes. Another incentive is that some states offer a tax break on contributions, which will give grandparents and generous relatives an added reason to help out. Most 529 savings plans offer a range of investment options where the underlying investments become more conservative as your child gets closer to college age. You can even enlist your family and friends to boost your savings through credit card and shopping rewards programs such as Upromise, Fidelity and Babymint.
Coverdell Education Savings Account
With a Coverdell education savings account, total contributions for a beneficiary cannot exceed more than $2,000 per year, regardless of how many accounts have been established. Amounts deposited grow tax free until distributed and remain untaxed as long as they are less than a beneficiary’s qualified education expenses at an eligible institution. One advantage of Coverdell accounts is that in addition to colleges, eligible institutions include public, private or religious elementary or secondary schools.
Another college savings option is a Roth IRA. Roth IRA accounts require minimum initial payments of at least $2,500 a year or $200 a month and are tax-exempt. When your tot gets older, she can contribute any summer or part-time job earnings as long as earned income is equal to, or more than, the amount of the contribution. The 10-percent early distribution penalty for earnings withdrawn before age 59 may be waived under the special exception for higher-education expenses, which is why some people use these accounts for college savings. The downside is that the distribution must be included as income on your child's federal financial-aid application for the following year, possibly reducing the amount of need-based financial aid she receives.
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