The College Savings Cheat Sheet
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Want to start saving for college, but too overwhelmed by all the choices? Don't let the mumbo-jumbo get you down. It's never too late to start saving for college, but it's never too early either. Here are six tips to get you started.
Get a Sense of College Costs
Knowledge is power. But too often, parents let fear get in the way of it. You can't save for college if you don't know how much it costs. Educate yourself on education. Compare the price tag for state schools, private schools, two-year versus four-year schools, and in-state versus out-of-state tuition. All these eventual decisions greatly impact the future cost of your child's college education. There are plenty of college cost calculators available on the Internet. Put them to use! One of my favorites is: http://www.collegeanswer.com/paying/lt_financial_planning/ltfp_collcost.jsp.
Get to Know the Numbers 529
When it comes to saving for college, 529 could be your lucky number. Section 529 Qualified Tuition Plans are especially set up for parents saving for college and they can help you tax-wise. Basically, the plans come in two flavors: prepaid tuition plans and college savings plans.
Prepaid tuition plans are in some ways like gambling. The state sets a price and then takes the risk that the amount of money a parent gives them today, will be enough to cover the future cost of an in-state university education, far down the road, once Junior is old enough to pack his bags. How ironclad that guarantee is depends on the terms of the plan. Separate plans for college housing costs are also available.
In contrast, a college savings plan doesn't guarantee that the investments will earn enough to keep pace with college cost inflation. Investment returns are determined by how the money is invested. If the portfolio doesn't keep up then you (or your child) have to make up the difference.
Not sure whether your child will go to State U? That doesn't necessarily mean that a prepaid tuition plan isn't the better choice. Before dismissing this option, ask what happens to your investment in a prepaid plan if the child decides not to attend a state college or university.
Shop Your Home State First
A majority of states allow some form of tax savings for contributions to a Section 529 account, but to get the deduction most states make you keep things within their borders, by choosing a state-run Section 529 Plan. Pennsylvania is currently the one exception to that in-state rule. Sites like SavingforCollege.com let you compare plans across states and see how your plan stacks up.
Section 529 plans aren't the only game in town when it comes to tax advantaged college savings. The Savings Bonds for Education program allows bonds held in the parents name to be redeemed tax-free come college time, for qualified educational expenses. Eligibility for this program is based on the parent(s) tax filing status and modified adjusted gross income, so this option isn't for everyone. For more details, click on http://www.publicdebt.treas.gov/sav/saveduca.htm.
Coverdell Education Savings Accounts (CESA) used to be known as Education IRAs. Distributions used for qualified education expenses out of these accounts are free of federal income tax. The catch? Contributions are limited to $2,000 per child from all sources and there is a modified adjusted gross income phase-out for contributors that can limit the size of the contribution.
Read the Fine Print
Fees and expenses are a drag on account returns and need to be considered as part of the mix in deciding between types of accounts. 529 plans charge an annual management fee as a percentage of the assets value. So do mutual funds. And fees hugely affect your bottom line. For example, if a fund charges a front end sales load of 5.75 percent, then only 94 cents of your college savings dollar gets invested for future return!
So what about all that tiny print on the back of the brochure? Read it. Fees are sometimes bundled together but may be shown separately. Is there an annual maintenance fee? A fee to open an account? To compare plans, you need to compare fees.
Make It Automatic
You can't spend cash that never hits your wallet. An automatic investment plan (AIP) moves money into a college savings account on a regular schedule, without any further action on your part. AIP contributions keep college savings on track. And the fact that you don't have to approve them constantly makes it a little less painful.
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