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Start Saving Now for Baby's College Fund

Alison Wood |31, October 2012


As you rock and cuddle your newest addition to the family, you consider the bright future that lies before your little one. Will he be a doctor, a scientist or maybe even the next President of the United States of America? You have already decided you are going to give your dumpling the best this life has to offer, and even more. But then reality sets in. College. Yes, one day your child will need to further his education and that is going to cost big bucks! How in the world are you going to be able to pay for or assist paying for your child's higher education? Start small and start now!

Take time to sit down and compute your monthly spending. Though you might think you are not buying any extras, taking the time to think through where all the money went last month might be an eye-opening experience. After surveying the expenditures, look for excess. Are you buying a cup of joe every morning from your favorite coffee house? If your latte is , multiply that times five working days, and that is a week -- just on coffee. If you sacrificed your coffee outings and made your own french vanilla lattes at home, you could invest about a month towards your child's college education.

Getting a manicure at the salon once a month? Try to do your own at home and watch your pockets fill up with cash for higher learning. After you come up with a little extra dough, there are some great ways to invest your money to get the biggest bang out of your buck. Here are a few:

Coverdell ESA Plan
These savings accounts are closely related to IRAs, but can only be used for educational purposes. Money in these accounts accumulates tax-free. The contribution ceiling is ,000 per year. If you do not plan on saving more than ,000 a year, this may be the plan for you. If you have many children this account may be a winner for your family. Any funds that an older child did not use can be passed down to a younger child for their college education needs.

529 College Savings Plan
This is an investment account that is tax-free. As long as your withdrawal from this account is used for educational purposes, it will not be taxed by the federal government. The money from this account must be used for an accredited college or university. Different states might differing plans. So, check with your state's rules and regulations before opening this type of account. For parents who desire their children to attend a private institution there is also a 529 Private College Savings Plan. These plans could be a great idea for a gift request from close relatives. Anyone can open a 529 College Savings Plan for your child. And, best of all, if you open the account, you decide when to withdraw the money. Even when your child turns 18, the rights of the account still belong to you.

IRA and Roth IRA Accounts
These investment accounts are easier on the person that despises paying all that income tax on savings! Deductible and non-deductible plans are your options in the classic IRAs. In a deductible plan, contributions are tax-deductible. Be aware, though, that when you withdraw money from the account, you'll be taxed on both your contributions and your earnings. Contributions are not tax deductible in a Roth IRA. However, your earnings are tax-free, but only if you withdraw them after the five year holding period.

Custodial Accounts
This is a fancy word for a savings account that the parent controls until the child reaches 18 years old. The first 0 of earnings each year are tax free. The proceeding 0 are taxed every year at your child's rate, which is typically 15%. The federal government does tax for withdrawals after the first 0. This savings option is flexible because people of all income levels can open an account and there is no annual limit for contributions.

Another option is a college plan through your insurance company. Some insurance companies offer college plans for kids through a life insurance/college savings plan package.

Start researching today the savings plan that best suits your family's needs and income. Invest a little at a time. The preparations you make now will help ensure a greater opportunity for learning in your child's future. Help him reach for the stars!

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