Saving for College
Parents today face the daunting question, how much will tuition cost when my child goes to college? Though it is difficult to know exactly how much tuition will be when the time comes, experts project rapid yearly increases. As sited online by Baby Center, between 2006 and 2007, fees rose 5.9 percent at four-year private colleges and 6.3 percent at four-year public colleges. Before you lose all hope and give up on even considering saving, college is still a worthwhile investment in your child’s future. According to the U.S. Census Bureau, people with four-year degrees earn nearly twice as much as those with high school diplomas. That can potentially add up to over a million dollars in a lifetime.
There are a number of options available to parents to save for your child’s future. Some of the post popular options include:
529 College Savings Plans: Investment accounts that allow you to set aside money for your child’s education and let it grow tax-free. The federal government won’t tax your withdrawal as long as it’s used for higher education at any accredited college or university in the country.
Prepaid Tuition Plans: Investment accounts that allow you to pay for your child’s future college tuition, or a portion of it, at today’s prices. Prepaid tuition plans are administered by individual states and most can only be redeemed at public colleges and universities in that state.
Coverdell Education Savings Accounts (ESA): You can make a contribution of up to $2,000 a year with post-tax dollars. The money grows tax-free, and neither the contribution nor the interest is taxed when you make a withdrawal if it’s used for education purposes.
Custodial Accounts: A savings account in your child’s name that the custodian controls until he/she reaches legal adulthood. The first $850 earnings each year are tax free, and the next $850 are taxed annually at your child’s rate. Any earnings beyond that are taxed at your rate. Withdrawals are subject to federal tax.
IRA and Roth IRA Accounts: Traditional IRAs come in two forms, deductible and nondeductible. In a deductible IRA, your annual contributions are tax deductible, but when you withdraw money from the account, you’ll be taxed on both your contributions and your earnings. In a Roth IRA, your contributions are not tax deductible, but your earnings are tax-free if you withdraw them after the required five-year holding period and use the money for qualified expenses such as a college tuition.
There are advantages and disadvantages for each so research options closely when selecting the best savings plan for your family. So how do you find money for tuition in what is an already tight budget? BabyCenter and Consumer Reports offer parents helpful money saving tips that can then be redirected towards your child’s college education.
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MaryAnn Viviano, Business Operations Director, has been with Kidspace Children’s Museum since 2004. Prior experience includes working for the American Red Cross after receiving a BA in Communications from the University of Texas at Austin.