Investing For College
How can I start saving for my child's college education?
When it comes to start saving for your child's college education, the fundamental thing is you're just going to start saving money. It's how you save that money is really where the question is. You could just save the money as part of your overall investment strategy, the money's in your name. You could put the money in your child's name and be saving it that way. Or, you could be putting the monies into accounts specifically designed for college savings which give you some tax deferral.
What is a "529 plan"?
A 529 plan is a college savings vehicle that allows money to grow on a tax-deferred basis, and when the money's pulled out, if it's used for qualifying college education expenses it's tax free. Anybody can set up an account for anybody else and make contributions into that account. And the money that's contributed into that account is going to grow tax-deferred, and as long as the money is used for qualified secondary education expenses, then the money is actually going to come out tax free.
What is a "Coverdell Plan"?
A Coverdell plan, which is many times referred to as an ESA, or Education Saving Account, is another type of tax deferred savings vehicle. The advantage of a Coverdell plan over a 529 plan is you have more flexibility in your investment options and also you can use the money for education prior to college, so it could be used for high school, even private elementary school the money can be used for. The other difference from a 529 plan is that the Coverdell plan has contribution limits, so you can't put as much money into a Coverdell plan as you can into a 529 plan.
What is a "Uniform Gift to Minors Account" (UGMA)?
An UGMA account or a Uniform Gift to Minors Account is where a parent is putting money into an account in a child's name. Uniform Gift to Minors Accounts, or UGMAs, are really trust accounts. It's the child's money and you, as the child's guardian or the custodian for the Uniform Gift to Minors Account or UGMA are responsible for the investments on those assets. The taxation with those investments will be taxed at a child's tax bracket. There is a kitty tax so if there is a lot of taxable income being generated by the investments on a Uniform Gift to Minors Account or UGMA, the tax cost will flow to the parent. So there's not a lot of tax savings on a Uniform Gift to Minors Account, or UGMA. Another concern with Uniform Gift to Minors Accounts or UGMAs is that they become the child's money at age 21.
How can I calculate the potential cost of college for my child?
Calculating college costs is probably one of the most difficult things to do, because there has been such a large inflation rate on college costs recently. Probably a rate of inflation of between 7% and 1% a year. What you want to do is think about the potential colleges that your child might go to, contact them directly and try to find out what it costs to go to those colleges today. You want to look beyond tuition costs when calculating college costs. You also ought to look at the cost of living. Some schools are in very expensive areas. So what the cost of living might be, books, fees, tuition. And if it's not local, you want to factor in also the transportation costs for the child to come home and visit for holidays.
