Saving for College?

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Regardless of where you are with saving for your child’s college education, it’s never too late–or too early–to start.

If your bundle of joy just arrived, you have 17 years to plan accordingly, so let’s take a look at a few options to get you there. Options abound; take advantage of them!

529 College Plan
These plans are known as Qualified Tuition Programs, or QTPs, and they are in more than 30 states at this time. They are popular because you invest after-tax dollars into them, and then you are allowed to use the plan funds tax-free for qualified education expenses such as tuition and books. Every state operates their own plan, so check the various investment options, fees and other associated costs.

Keep in mind if your child decides not to attend college, you may have penalties and fees when you withdraw your money, but if you have another child, you may be able to transfer the account to him or her.

One way parents opt to grow these accounts faster is through a program called Gift of College, which allows family and friends to deposit gifts directly into the 529 plan. Trinkets and toys for birthdays and holidays may be thrown away or break, but cash for college will grow. There is usually a processing fee for each transaction, but it’s worth it. A similar plan is called Leaf, but instead of your family members depositing directly, they send the gift to you for redemption into the plan.

Some credit card companies offer a direct deposit program into your child’s 529 plan using the popular cash-back feature as the savings vehicle. You earn 1 percent or 2 percent on each qualifying purchase, and the company deposits it directly into the 529 plan. It’s probably not a large amount, but consistent savings, compounded over the years, will make a difference. Some allow other family members to tie their credit cards to the 529 plan too.

Roth IRA
Like the 529 plan, you contribute after-tax dollars to a ROTH Individual Retirement Account, which can be withdrawn later tax free. These plans are typically used for retirement purposes after age 59½, but Roths also allow you to withdraw funds tax free and penalty free after five years to pay for qualified education expenses. So if you aren’t too sure your child will even go to college, this could work best for you. However, the income and contribution limits may not be as suitable as the 529 plan. As always, check with your financial advisor.

Coverdell Plan
These accounts are similar to 529 plans, as long as you use the money to pay for education expenses. One good selling point for Coverdell Education Savings Account plans is the money can also be used for private school tuition from K-12. The contribution limits are lower and eligibility phases out for high earners.

Prepaid College Plan
Since college tuition rises faster than bread dough, these plans allow you to lock in a portion now, even if your child is far and away from enrolling. Say the tuition at Best University is $20,000 today. You give them $10,000 now and that buys you half of a year’s tuition at that school when your child enrolls, no matter how high the tuition gets. Not all states offer this plan and some have already closed enrollment, but it’s worth checking out.
UGMA and UTMA Custodial Account

These accounts are called Uniform Gift to Minors Act Accounts or Uniform Trust to Minors Act Accounts. They hold money in a custodial account for minors until they reach adulthood, so you can open one to save for education expenses. However, the tax benefits are not as plentiful as with the 529 plan. Also, your child is free to use this money however they like, including not paying for their education!

If you find that you simply don’t have enough money to save each month, begin small and automate your savings. Open a savings account and see if a $20 automatic deduction from each paycheck is possible. If it’s too much, don’t worry. Just back it down to $10. Doing some saving is better than doing nothing.

Find ways to cut out unnecessary expenses from your budget, even small items. They add up.

Encourage your child to pitch in. Beginning the savings habit early, plus securing after-school or summer jobs can help your child develop a work ethic that leads to college success.

Finally, keep in mind that most families use a combination of savings, scholarships, internships, college loans and part-time jobs to complete their college educations. In the end, it’s the degree that matters. ■

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