A college education
is quickly becoming more expensive than buying a house. With costs continually increasing, it is no longer practical to only save for college through traditional savings accounts. Instead you will need to combine traditional savings with investment activities in order to keep up with rising education costs, and/or take advantage of state sponsored tuition savings programs.
Government Savings Bond
One of the most trusted college savings instrument is the government savings bond. These investment products offer a doubling of your investment in 20 years. These are good to purchase when a child is first born; however, in order for the child to use the proceeds from the bond for college expenses, bonds bought after the child is two will need to be cashed out before they are completely mature, and as a result they will have to pay early withdrawal fees and the bond won’t be worth as much as if they were able to wait until they were fully mature. You can increase the amount of bond money that your child is able to cash out for college by asking family and friends to buy savings bonds instead of, or in lieu of, birthday and Christmas gifts.
For more information about Savings Bonds please visit:
U.S. Treasury Direct
Education IRA (ESA) or Coverdell Education Savings Account
This savings account program provides a tax advantage to participants. How it works is that once you set up your ESA you make contributions up to $2,000 per year. You pay taxes on the money that you deposit, however, when you are ready to make a withdrawal you don’t have to pay taxes on the interest or principle that you take out, as long as the amount withdrawn is equal to your qualifying educational expenses. You can use this account to pay for educational expenses related to primary, and secondary education expenses. Finally, you should note that this account is only an option if your annual gross income is less than $190,000 for a joint return or $95,000 for a single return, and the money in the account must be used before the beneficiary turns 30 years of age.
529 plans have gained a lot of recognition recently because of the enormous increase in college education expenses. College tuition and fees are rising at a rate of nearly 5% a year. To help parents prepare for expenses that will be nearly double what they are now, state sponsored 529 plans allow parents to lock in current college rates for state schools, and in some instances allow state tax breaks for contributions made to these plans. The amount of money that you can contribute to these plans is well over $200,000 in every state, so they are a very flexible and practical accounts to open. While this plan allows you to lock in current education rates, the state controls your investment options, which could impair your money’s ability to reach its maximum growth potential. For more information about 529 plans in your state, visit your state’s department of revenue website.
Money in your ROTH IRA can also be used to pay for college expenses. If your employer matches your contributions then this may be a good way to bulk up your college fund. However, this scenario is not an ideal one. If you withdraw funds before you are 59 Ã?Â½ years of age you will be faced with taxes and a 10% penalty. The plus side is that if the funds are used for educational expenses then the penalty is waived, and if you only withdraw what you contributed, then you won’t have to worry about taxes either. This means that if you and your spouse both invest the maximum amount allowed each year, or $4,000, then even at a moderate gain you will have plenty of money to pay for four years at a public college. Another thing that you should consider if you will be using your ROTH IRA to save for your child’s college expenses, is that you will also need to find another avenue to save for your own retirement.
The aggressiveness of your investment activities should reflect how long you have to save before your child enters college. If you are starting your investment activities from when the child is first born, you can maintain a portfolio of mostly bonds, however, the closer you get to the college years, the more aggressive your investments should be. For example, when your child is first born your investment portfolio should be mostly bonds, however, when they are nine or ten, then your investment portfolio should be made up of about 80% bonds and 20% moderately aggressive to aggressive funds. Ask your investment professional for advise on which funds have performed well, and which investments will be likely to pay enough to help you reach your investment goals by the time your child graduates from high school.
For more information on various investment options you can visit the following websites:
Kiplinger’s Personal Finance
The Investment Fool
Investing for Beginners
H&R Block Investment Center