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Saving for A Child's Education

Getting a college education has become more and more crucial to obtain employment and enter into a career in the United States. Unfortunately, the cost of a college education has continued to increase. Experts say that a person entering a public college or university in the year 2021 (children born in 2003) will have to spend approximately $95,000 per year for an undergraduate degree; that price increasing to approximately $240,000 for a private college or university.

With the cost of a college education increasing, it makes sense to start saving as soon as possible. Before you put money into any type of savings program, it is important to find out exactly what you need. Take the time to review financial aid packages for families with your income level and asset portfolio to establish a baseline savings target.

Different Savings Options

Now you are ready to start saving money. Let’s take a look at some of the options available to help you save for your child’s college education:

Savings Accounts
These accounts are the easiest way to save money; however, they have the lowest interest rates of all options available for saving money. Additionally, savings accounts are insured and are considered to be one of the safest places to deposit your money.

Certificates of Deposit
These accounts guarantee a higher rate of return than a basic savings account, but the rate is still lower than riskier options. Certificates of Deposit are federally-insured and are considered to be a safe place to deposit your money.

Individual Retirement Account (IRA)
An IRA allows you to experience tax-deferred growth over a period of time. When you turn 70-1/2, you must begin taking withdrawals. If you make a withdrawal prior to age 70-1/2 for qualified educational purposes, there are usually no negative tax implications.

Roth IRA
While Traditional IRA earnings are tax-deferred, Roth IRA earnings may generally be distributed completely tax-free after age 59½. In addition to the age requirement, tax-free distributions cannot be made until after five years; however, an individual can take distributions of their contribution amounts or of their interest and just pay taxes on that. Again, if a withdrawal is made for qualified educational purposes, there are usually no negative tax implications.

Coverdell Education Savings Account (CESA)
Formerly known as an Education IRA, this account will allow you to save up to $2,000 (tax-deferred) per year. Not only can these funds be used for college, but they can also be used for elementary and secondary school purposes. Funds in this account are considered the student’s, not the person (or parent) who originated the fund. One disadvantage of the CESA is that funds saved in this account are considered to be the student’s assets when financial aid is calculated.

Educational Savings Account (ESA)
Governed by the IRS, an ESA provides you with potentially tax-free earnings if the money is used for qualified educational expenses. You also have the ability to deposit up to $2,000 per year.

529 Plan
This plan is a state-managed investment fund that earns interest and allows large annual contributions. Earnings and withdrawals are usually free from federal taxes. Additionally, most 529 Plans do not affect a student’s status to receive financial aid.

State Pre-paid Tuition Programs
These plans allow you to lock in current tuition rates for future use and are guaranteed to increase in value at the same rate as college tuition. Most states offer at least one type of in-state public tuition program.

Uniform Gift to Minors Act/Uniform Transfer to Minors Act (UGMA/UTMA)
You can use this account to give a “gift” of up to $11,000 to your child without being taxed; the child can use this “gift” for any purpose.

Tips for Saving for College

When saving for your child’s education, there are some important things you should consider:

  1. If possible, put college funds in your name instead of your child’s name. This will keep any assets from being counted against him/her when it comes to seeking financial assistance.
  2. Because saving for college is a long-term goal, other things will get in the way. Be sure to save automatically when possible so you do not have to remember or make a choice each month.
  3. Look into how a particular savings plan or program invests its money. Some allow you to deposit up to $200,000 tax-free, while others limit the amount.
  4. You may want to consider speaking with a financial advisor or other expert to find the program that is right for you and your family.

Whatever you decide, you should start saving for your child’s future today. The sooner you start, the more will be saved and ready for use when it matters.

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