College. I’d like to think this is eons away for my little ones, but it will be here faster than I think. While I like to believe that my children are super smart geniuses, who will be getting full rides to whichever school they choose (Harvard has already been calling us…;)), the reality is we need to start saving for college, and the earlier the better.
Here are three specific vehicles to help get you started. Remember, the sooner the better!
Florida Prepaid Plan
One great option is the Florida Prepaid Plan. The object of this plan is to lock in the current Florida rates for future use. The earlier the better for pre paid plans. If you enroll your child when they are born, you can lock in the lowest rates!
The enrollment period is currently over, but you can submit an application for the 2013-2014 year. The prices will be available in the fall. There are four different plans/prices you can choose from depending on your family needs. This is a great plan if you know your child is going to go to school in Florida. But even if he or she is not, some of it can possibly be transferred to another institution. If your child gets a scholarship or doesn’t go to college, you have the option of transferring to another beneficiary or even having the plan refunded (a fee may apply). For more information, see www.myfloridaprepaid.com.
Coverdell Educational Savings Accounts
A Coverdell Educational Savings Account (ESA) is another way to help save for educational expenses. There is a maximum contribution amount of $2,000/year, which are non-deductible. The beneficiary has to be under age 18 or have special needs. The contributions grow tax deferred over the years. However, if withdrawals are used for qualified educational expenses (tuition, books, etc.), they are tax-free. An advantage of the Coverdell is that it can also be used for elementary or secondary education as well as college expenses. For more information, click here.
A 529 plan is an education savings plan sponsored by an individual state and operated by a financial institution of the state’s choosing. You can mostly choose whichever state-sponsored 529 plan you like to participate in, while not being obligated to send your child to school in that state.
For example, you could choose a Vermont 529 plan but send your child to school in Florida, or wherever. The advantage of 529 plans is that they are essentially like a non-deductible IRA. For both a 529 plan and a non-deductible IRA, you can contribute to them over the years and the earnings or growth on the contributions are tax deferred (taxed in the future). However, if you use the withdrawals towards qualified educational expenses (tuition, books, etc.), they are tax free!
The plan takes care of investing the money in a pre-determined mutual fund of your choice (most plans have a couple of options to choose from); however, you can choose to switch this fund to a more or less aggressive plan, depending on the age of your child. So you can just sit back and watch it grow.
Another advantage of this plan is that whoever opens the account is in charge of the plan, and can take the contributions and earnings back (subject to taxation and penalties) if not used for qualified educational expenses. Since I am in charge of the plan, and if my son decides not to go to college (not if I have anything to say about it!!!), that would money come back to me or could be transferred to another beneficiary. Or, if he receives a scholarship, then he may not need the money. (Caution: If not used for qualified educational expenses, the withdrawals may be taxable!) Check out www.savingforcollege.com for much more detail as well as links to the different state plans.
These are just a couple of different ways you can choose to save for college. You can simply put money away into a simple savings account as well! Whatever you choose, the most important thing is to start sooner rather than later! A little bit every month can add up nicely over the course of 18 years.
If you do decide to use one of these plans, it is best to contact your C.P.A. or financial advisor beforehand.
Have you started saving for your child’s education? What sort of ways do you choose to save for college?