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How to Save for Your Child’s College Education

Updated on December 22, 2009

Your child’s college is education is likely to be one of the biggest expenses you will pay as a parent. With tuition rates consistently increasing, having a savings plan for your child’s education is a necessity. There are several college savings plans to choose from, but one of the best is the 529 plan. It facilitates regular savings from you while offering some great tax benefits; your investments remain tax free and upon your child entering college can be used tax-free for expenses. 

To begin with, estimate your child’s future college education costs and what you will need to contribute. While this will certainly vary depending on the school he or she attends, you can review financial aid packages for families with income similar to yours and examine studies projecting future college expenses.

Choosing a plan should be done carefully. Find out how much you can deposit tax-free, since some plans limit the amount and tax funds that exceed the limit. Examine the plan’s investment strategy. Does it show a history of risky investments? Study the plan’s history of performance to get an idea of how it is likely to perform in the future.

A 529 plan is an attractive option. These plans may be run either by a state or by an institution of higher education. You can choose a plan run by a state in which you do not live and in which your child will not attend college. All the funds you deposit are untaxed, and may be withdrawn untaxed to pay your child’s college expenses. You can even open a 529 plan before you have children to ensure their future education.  529 plans are generally dependable and professionally administered. Also, the donor, not the student, retains all rights to deciding when and how funds are withdrawn.

Another option is the Coverdell Education Savings Account (CESA), which used to be called the Education IRA. This plan differs from the 529 Plan in several ways. First, you can only deposit up to $2,000 per year tax-deferred. Secondly, funds belong to your student and cannot be returned to the donor. However, the CESA is beneficial in that funds can be used toward elementary and secondary education instead of only to higher education.

Whatever plan you choose, you should start saving early, so that your child’s education does not become an overwhelming burden to you. And remember that as a parent, you are not obligated to pay for everything. Helping our kids is great, but you need to consider your overall financial situation as well.

Image Credit: AMagill, Flickr

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