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Both students
and parents can make the most out of the educational money
they set aside by exploring all of the savings tools available.
Since the
cost of education is rising faster than the rate of inflation,
traditional saving options like CDs and savings bonds just
can't foot the bill alone. Fortunately, options such as Coverdell
Education Savings Accounts (CESA) and 529 Plans make planning,
saving and paying for college much easier.
It is never too early, or too late, to begin
saving for education. If you earn your own money from a part-time
job, try to put some away before you decide how to spend it..hard
to do, but essential. Start out small with maybe 5-10%, and
gradually increase the amount as your earnings allow. As your
piggy bank gets bigger, put your savings to work for you.
Open a bank account that lets your money grow but still offers
easy access in times of severe need. Most banking institutions
offer traditional savings accounts and certificates of deposit
that pay interest, and you could even roll your savings into
a stock option or mutual fund account at a broker house such
as TD Ameritrade etc.
For Families
Saving money is the primary way to prepare for the costs of
education. By setting aside a certain amount each month or
payday, your family can build up a nice fund for college.
For instance, investing just $100 a month for 18 years will
yield $48,000, assuming an 8% average annual return (passbook
savings wont of course offer that reward). In addition, if
parent and child begin saving early on, the amount you have
to set aside each month will be much smaller.
Some of the most common investment options are described below.
Coverdell Education Savings Account
(CESA)
The Coverdell Education Savings Account helps families save
money for the education expenses of a child for school. One
important difference between a CESA and other education savings
plans is that funds can be used to pay for primary and secondary
(K-12) education as well as higher education.
The CESA allows you to make an annual non-tax-deductible
contribution of $2,000 per child into an investment trust
account. As the funds in the account grow, they are not subject
to federal taxes. Additionally, withdrawals for qualified
education expenses are also free from federal taxes (not free
from state taxes). Qualified expenses include tuition, books,
and fees at an eligible educational institution.
Contributions must be made in cash before
the child reaches age 18. Anyone can contribute, including
grandparents, family, friends and even the student, as long
as the income qualifies. To qualify for a full or partial
contribution, the contributor's adjusted gross income must
be less than $110,000 if single and $220,000 if married.
To learn more about a Coverdell Savings Account,
speak to a certified financial advisor.
529 Savings Plans
Now, no matter what state you live in, there is a 529 program
available for you to begin investing in. These state-sponsored
plans help families set aside funds for future college costs.
Commonly referred to as "Section 529" plans these
come in the form of either prepaid tuition plans or savings
plan options.
The 529 prepaid tuition plan allows you
to pay now at today's rates for school tomorrow. Your account
is guaranteed to pay for tuition and fees at public universities
and colleges in the state by the time your child graduates
from high school. Room and board is not covered in a prepaid
tuition plan.
The 529 savings plan, on the other hand,
allows the full value of your account to be used at any accredited
college or university. The 529 savings plan also covers all
qualified higher education expenses, including room and board.
Each state determines its plan design, including what the
maximum contribution per student per year will be. Investments
in 529 plans grow tax-deferred until the child is in college,
at which time they will be subject to the child's presumably
low tax rate. Distributions to pay for the student's college
costs are federal tax-free, and individual states may offer
additional tax breaks as well.
To learn more about 529 Savings Plans, once
again, please speak to a financial advisor. |
