How to Save for Your Child’s College Education

Better sit down. Experts say that someone born in 2003 and entering a public or university in 2021 can expect to shell out $95,000 for an undergraduate degree. A private may run upwards of $240,000. Although there are several savings plans to choose from, the 529 plan is a standout. In addition to providing a means of establishing a regular savings program for you, there are big tax advantages–namely that your investment grows tax-free until the enters and can then be withdrawn untaxed to pay tuition. Take steps now to ease the future shock of costs.

Instructions

Step 1
Estimate how much you will be expected to contribute to your child’s college . Review financial aid packages for families with your income level and asset portfolio to establish a baseline savings target. Web sites like Kiplinger.com and FinAid.com provide a useful family contribution estimator.

Step 2
Choose your college savings plan wisely. Some allow you to deposit more than $200,000 tax-free, while others limit the amount. Look into how a plan invests its . Some managers buy mutual funds; others, certificates of deposit. Be sure to get details about how the plan has performed in the past. Here is a sampling of plans:

Step 3
State-operated 529 plans. A 529 is one of the most attractive options available to help families for college because anyone can open one, the money deposited grows tax-free, and it can then be withdrawn to cover college costs without being taxed. (A 529 also has important estate-planning benefits.) You can even begin saving before your child is born. Every state now operates at least one 529 plan. First, you select the state plan that best fits your needs based on how much you can invest, how the funds are invested, and the tax ramifications, such as being able to avoid state taxes in addition to federal taxes. Second, sign up using a simple form. After that, you begin to deposit as much each year as you can under the plan’s guidelines. Your money is invested and grows completely tax-free, and each plan is professionally managed.

Step 4
Coverdell Education Savings Account (CESA), formerly known as an Education IRA, will allow you save up to $2,000 a year tax-deferred. The biggest advantage is that funds can be used for elementary and secondary school education, in addition to college. However, the cons far outweigh that advantage: CESA funds are considered student assets when financial aid is calculated, potentially reducing the amount of financial aid your child will be eligible to receive by falsely increasing their anticipated earnings. The money is also considered the student’s and cannot be turned back over to the person who established the account, as with a 529. Finally, with smaller maximum contributions, administrative fees can turn out to be larger in proportion to the dollars saved.

Step 5
State prepaid tuition programs, which are a variation of a 529 plan, let you save by locking in current tuition rates for future use. Prepaid tuition plans are college savings plans that are guaranteed to increase in value at the same rate as college tuition. So by purchasing the equivalent of a year’s worth of tuition today, you ensure that in 15 years your investment will still be worth a year’s worth of tuition at the current rate. The tuition rate used is at an in-state public college, so if your child elects to attend a private college, you will still be responsible for paying the difference between a year at a public college versus a year at a private one.

Step 6
Uniform Gift to Minors Account/Uniform Transfer to Minors Act (UGMA/UTMA) is an old standby that allows you to give your child up to $11,000 without getting hit by gift tax, which he or she can use for any purpose. That’s the good news and the bad news–it’s more flexible in terms of how the funds can be used, but your child assumes complete control at age 18. Most states offer these accounts, which can be set up at a brokerage firm.

Step 7
Shop around for a 529 plan, once you’ve decided what features are of greatest value to you. Even though your plan is operated by a particular state, you’re not limited to choosing a school in that state. Rather, you can use the money for any college. Some plans, however, do offer tax advantages for in-state residents.

Step 8
Compare plans. Use Fidelity’s Comparison Table (fidelity.com) to evaluate the various college savings programs and to see which best suits your needs and situation. Check out Savingforcollege.com to compare 529 plans state by state.

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