Starting a College Savings Plan for Your Child

Starting a college savings plan for your child can seem as overwhelming as saving up for a new home but is one of the best things you can do for his or her future. It can take decades to pay off student loan debt, and the cost of going to college is only rising. Sending your child with even a small fund for expenses like tuition, room and board and books can make a huge difference in their financial health over their lifetime.

An easy way to manage a college savings account is setting up a 529. A 529 is an interest bearing account that allows you to save for college expenses. A 529 is preferable to other investment options because of the tax benefits. You pay normal income tax on the capital you invest, but there is no tax on the interest earned or on the eventual withdrawal as long as the money is used for educational expenses.

There are two types of 529 plans: prepaid and investment. Prepaid plans allow you to pay for tuition credits at an in-state college at the current rates, so today's tuition prices are locked in. These plans are guaranteed by the state, so there is no risk in investing in a prepaid plan. If your child chooses a different school, the money is still available, but you will be responsible for paying the difference in cost if there is any.

The more popular option is the investment or savings plan. With a 529 investment plan, you invest your money without specifying a college. You cannot lock in the tuition rate, but the money can be withdrawn tax-free to pay for any educational expense. The money can be used at any participating college in the country, and it is transferable to other beneficiaries if the child does not choose to go to college.

Money from 529 investment plans can be withdrawn at any time for non-educational needs, but the gains are taxed, and there is a 10 percent penalty. A few exceptions to the penalty are if the child earns a scholarship or if he becomes disabled or dies. The money can be transferred to other family members without penalty as well.

Starting a 529 early will allow your investment to grow. You can start with a small contribution and have automatic deposits made, or contribute when you are able. Over the course of 18 years, you could easily have all four years of tuition paid and then some.

Other Savings Options

A 529 is the most tax-beneficial college savings plan available, but there are other options as well. Coverdell Education Savings Accounts, formerly known as Education IRAs, are trust funds designated for the education expenses of the named beneficiary. There are some restrictions on these accounts, like a maximum annual contribution of $2,000. The money must be used by the time the beneficiary turns 30, or the account is subject to income tax and a 10 percent penalty.

U.S. Savings Bonds are eligible for the Education Bonds Program, which makes the interest on the bonds tax-free. Savings bonds are low-risk because they are backed by the government, but they offer only modest returns. A CollegeSure CD through College Savings Bank is a low-risk investment like any certificate of deposit. It yields a guaranteed, fixed percentage of average college costs when it matures.

There are many options for starting a college savings plan for your child. Contributing now can help alleviate the financial burden of going to college. Getting a great education with minimal debt will set them up for a financially secure, successful future.

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