If you have young children, you have probably already tried
to get a sense of how much it will cost you to send your kids to college. When putting together a strategy for saving
for your child's education, following these three steps will help you reach your goal:
Start saving for your child's college education as
soon as possible, even if you can only afford to put away a small amount of money each month.
Set aside a certain amount of money on a monthly basis.
Otherwise, it's unlikely you'll have enough money saved when it's
time to pay your child's college education.
Segregate the money earmarked for college from your
other savings accounts. Consider contributing to either an
Education Savings Account or a 529 Plan, since these accounts grow tax-free.
EDUCATION SAVINGS ACCOUNTS
Under the current rules, you can contribute up to $2,000 per
child per year into an Education Savings Account (ESA). Amounts contributed grow tax-free, as long as any money withdrawn
from the ESA is used to pay for qualified post-secondary education expenses, or for private elementary school and high school
tuition as well.
Income Limitation: Unfortunately, single taxpayers whose adjusted gross income (AGI) exceeds $110,000 and married couples
whose AGI exceeds $220,000 aren't eligible to contribute to an ESA. Plus, allowable contributions are limited for single
taxpayers whose AGI exceeds $95,000 and for married couples whose AGI exceeds $190,000.
Planning Opportunity: Amounts contributed into an ESA don't
need to be made by the child's parents. If your income exceeds the threshold indicated above, ask somebody else, such
as a grandparent, sibling, aunt or uncle, or friend, to contribute $2,000 into an ESA on behalf of each of your children.
Beware: Before investing money into an ESA, however, try to figure out how your financial aid package might be impacted.
THE NEW AND IMPROVED 529 COLLEGE SAVINGS PLAN
Recently, 529 Plans got better. Below is a summary of
the current rules for 529 Plans:
Individuals can contribute up to $55,000 per child into
a 529 Plan in a single year. If you contribute $55,000 in one year, however, you need to wait at least five years before making
additional contributions to the plan. And if you contribute more than $11,000 in any one year, make sure to file a gift
tax return (Form 709) with the IRS. (Married couples can contribute up to $110,000 per child into a 529 Plan in a single
The money invested grows tax-free, as long as any distributions
from the 529 account are used for qualified higher education expenses. (Starting in 2011, the money withdrawn from a
529 Account may be taxable once again.)
Each state designated one financial institution to administer
their plan. That means that you can open 529 accounts with any of the large financial institutions. You can contribute
to any state's program, regardless of where you live or where you child ends up attending college.
Some states allow for a tax deduction if you contribute
money into the 529 Plan they sponsor. For example, if you pay taxes to New York State,
up to $10,000 per year ($5,000 if you're single) contributed into New York's College Savings
Program is tax deductible on your New York return.
What's the downside to 529 Plans? First off, the money you saved in the 529 Plan might reduce the financial aid you'll
be eligible to receive. Plus, you have no control over how the money in your child's 529 plan is invested. Before
investing in any state's program, make sure to determine whether the financial institution will invest your child's college
money as you see fit.
An alternative to contributing
to 529 Plan is a Roth IRA.