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Saving For Education |
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Parenting is never easy. Just when you think the kids are growing up and your concerns are over; it’s time to slice off a big chunk of your savings for college entrance. The most exclusive colleges in the country charge around $ 35,000 a year. Even retiring is not such a big financial gamble.
Some families can’t afford to send their kids off to college and invest in other ways at the same time. Unlike the 1980’s, there are no pension plans now to tide the parents over and college costs have increased so much during the past few years. So it all boils down to sending you kid off to a good college versus retirement. Are expensive schools really worth the trouble? Is your child gifted and or/motivated to make maximum use of an Ivy League college?
You must get your kid involved in the saving process. Experts recommend that about a quarter of children’s’ savings should go to college. A dedicated bank account can be set up for this purpose. Keep tabs to make sure that the account is not being drained for other purposes. Maybe you can convince relatives, family friends to also convert prospective birthday and Christmas gifts into checks for the college savings account. Taking out student loans can also contribute positively towards saving in the long term.
For parents who are lost between college savings and retirement savings, tax deductible plans are a welcome option. The earnings here are tax-deferred and funds can be withdrawn for your child’s college education penalty-free. Another benefit is that retirement plan assets are not counted in financial aid calculations carried out by colleges. This means that your child has a better chance of qualifying for financial aid, if your savings are in a retirement account rather than a regular savings account in the bank.
Another tip to remember is that any extra savings (in excess of what can be put in a retirement plan) should be deposited to an account under your name, not your child’s. This is because, when evaluating a student for receipt of financial aid, only 6% of the parents’ assets are considered available for college expenses every year, whereas 35% of the student’s assets are considered. In other words, your child’s savings account is at risk from being used for purposes other than financing college, such as a world tour or an extravagant shopping spree.
Here are some of the available college savings options:
529 College savings Plan
This plan is free of federal and, sometimes, state income taxes. It may be sponsored by the state or even the school. This type of plan allows investments up to $ 300,000 per child, enabling full funding of college education. The advantages include are high deposit limits, tax advantages and flexibility. But this money can only be used for higher education, so if you kid eventually opts out of college education, the funds will have to be transferred to another eligible family member, for his/her education. The problem arises when there is not such family member. In that case, the account will be closed and you may end up paying federal and even state income tax, plus a penalty.
Education Savings Account
Funds in this plan can be used for all levels of education, whether it is primary level, secondary level or beyond but contributions are limited to few thousand dollars a year. The investment can start from the birth of the child and the money is taxed at a lower rate than the usual parents’ rate. Tax-free growth of earnings is allowed and withdrawals are free when used for the correct purpose.
UGMA/UTMA accounts
These accounts allow you to save for any purpose than benefits your child and offer tax advantages. No contribution limits are imposed. One turnoff for parents is that when the children qualify as adults at the age of 18, they effectively control the finances. |
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