By: Tim Brugger, Debt.com Financial Fitness Trainer
In addition to the costs associated with raising your children – food, clothing and the latest Playstation – is the need to save for college. This can be a scary proposition, particularly when you see the direction tuition fees have taken the last several years.
There’s no need to rely solely on grants and scholarships, which may or may not be viable alternatives when the time comes. There are ways to help fund your child’s education that don’t require a Bill Gates-like income.
The most important step you can take is getting started when the little one is still in the cooing stage. This provides you one extremely important ally – time. There’s no substitute for time in the world of savings and investments, so let’s explore a few ways you can use this most valuable of assets.
Savings Vehicles
The Education IRA, or Coverdell Education Savings Account (CESA), is a great vehicle for investing in your child’s education. The contributions of up to $2,000 annually are not deductible like an IRA; however, if the proceeds are used for paying qualified education expenses, the tax-deferred earnings are distributed tax-free.
There are two key aspects of the CESA worth repeating. First is the tax deferred earnings. This means that all the growth within the account – dividends, interest and capital gains – are not taxed each year as they would be normally. The result is there are more dollars working for you each and every year, instead of being forwarded to our friends at the IRS.
The second feature worth noting is the tax-free withdrawals when used for school. This is a double beauty for parents. Not only did you not pay tax on the earnings each year, you won’t pay any when the funds are used for school expenses either. School expenses go beyond just tuition and books too. These can include living, transportation, lab fees; you name it.
As a sidenote, these investments can be used to pay qualifying expenses for both elementary and high school as well.
It’s also good to look into other college saving plans available to you, such as 529 plans.
These are state run plans that also offer some good tax benefits. Like the Education IRA, 529 plans (named after the IRS Code that dictates their rules) earnings grow tax deferred and withdrawals used for school are tax free. Some states will even give you a tax break on the contributions.
The Value of Time
To give you a sense of the impact investing early can have; let’s say you just brought little Johnny or Janie home. If you begin investing $50 monthly, earning a mere 5% annually, there would be over $17,500 when your son or daughter reaches age 18. Now, that may not be enough for 4 years at Harvard, but it can certainly make a dent on costs not covered by grants, student loans and other funding vehicles.
As with most savings plans, the difficult part is taking that first step and getting started. If you are uncomfortable doing so yourself, any financial advisor worth her salt can provide you with all the information you need to take advantage of your most valuable asset: time.
Even with the skyrocketing cost of college tuition, there ARE ways you can start saving for your child’s education now.