Have you started planning for your children’s college education? While many of us would prefer to put off even the thought of paying for college education, planning ahead can save you money and spare you from future headaches. Saving for your children’s education works just like any other investment: the sooner you start it, the better the chances your investments will enable you to pay this expense with ease
Saving Options
As with other investments, your choices of available savings plans are abundant.
UGMA - Uniform Gifts to Minors Act is a custodial account placed in your child's name and Social Security number, with a parent named as custodian. All or a portion of the earnings are tax-free or are taxed at child's rate;, however, it may impair their ability to qualify for financial aid.
Coverdell Education Savings Accounts, also known as Education IRA, allows for the earnings in the account to grow tax-free as long as distributions are used for eligible expenses, which are not limited to college costs.
Roth IRA Accounts - This is a good investment strategy that works for parents who will be at least 59 ½ years old when their kids are in college.
Section 529 College Savings Plans – The benefits include federal and, in many states like California, state tax advantages. The plans vary by provider, so investigate your options before you choose.
Your residence, income and ability to save will help you determine which plan to opt for from the full gamut of college plans.
Cost Reduction Options
Tax credit measures can provide further financial relief once the time has irrevocably arrived.
The Hope Scholarship enables families to receive a tax credit of up to $1,500 a year for the first 2 years of college to help offset costs like tuition and fees. The income restriction on using this tax credit is a max. $40,000 for single filers and $80,000 for joint filers.
The Lifetime Learning Credit offers a $2,000 tax credit taken for the third school year and beyond. The income limits are the same as those for the Hope Scholarship.
Retirement or College Saving?
When you’re facing the dilemma of how to balance saving towards your own retirement and your children’s college education, the rule of thumb is to save for retirement first. Financially, it usually makes more sense to fully fund your 401(k) or other tax-deferred retirement plans to grow that money tax-free. When you have college bills to pay, you may be able to borrow against your retirement plan to pay for some of your kid's education.