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Education
Start Saving Now for Your Child's Future Education Expenses
Tuition rates will continue to increase, according to experts. Therefore it is important to start saving now for your child's future education expenses. Luckily there are a number of options to choose from.
One of the best options when saving for your child's college education is the state 529 prepaid tuition program. This program allows you to lock in the tuition rate of state universities at the time you begin the program. The earnings are guaranteed to meet the price of tuition, even if your child attends ten years in the future. They will be able to transfer the accumulated funds to an out-of-state college, but the student would be responsible for paying the difference.
Another way to pay for future college attendance is the 529 college savings program. You begin to put money into a state-sponsored investment account. Anything earned on the account, and even withdrawals from it, are federally tax-free. You can use the 529 college fund for any in-state college or university. The major drawback on this program is that you are not guaranteed what you save will meet the tuition requirements when your child enters college.
Besides the 529 plans, there is also the Coverdell Education Savings Account. These used to be called education IRAs and allowed parents to save only $2,000 per year per child into a tax-free IRA. Any amount of money over that $2,000 may cause a penalty to occur. Changes have been made to the system. You can now use these funds to pay for elementary or secondary education as well as college. Income restrictions apply when making full contributions. However, if a family put $2,000 away each year for a child when it was born, and earned 5% interest, the student would have over $54,000 available when it graduated from high school.
A Roth IRA might be another option if you're not interested in the above. Contributions to a Roth IRA for educational purposes are income tax-free and do not incur the 10% penalty if you have to withdraw money prematurely.
With any of these savings plans, if someone other than a family member wanted to contribute, they may do so. In fact, contributions by grandparents may be beneficial for both parties. Not only will the contribution go toward a child's future education, it will also reduce the grandparent's taxable income. Annually, a grandparent can gift up to $12,000 to a grandchild for tax purposes.
Start saving now for your child's future education expenses. You will benefit your child by providing a college education and benefit your financial situation as well. Grandparents can also receive financial benefits by contributing to their grandchild's educational future. In fact, it looks like a win-win situation however you happen to look at it.
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