As every new parent knows, once your child has his or her first birthday party, you’ve already started planning for college too late.
Well, in some ways, we’re about 1 1/2 years overdue on our planning.
And did you know that when my daughter goes to college, at the age of 18, the average cost of one year at a university will cost $342,000! Okay, I made that number up because I am too lazy to look up the various college cost estimates.
Oh, sure, it would take about 10 minutes to open up a 529 plan and let the grandparents start contributing to it. But, you see, that’s not me. Like everything else in life (except, apparently, having a kid), I need to research it to death to find the best option.
And then I go with either (a) my gut instinct, or (b) whatever looks coolest.
I gotta tell ya – researching college savings options is like reading my old business law textbooks.
See what I’ve uncovered so far after the jump…
Yahoo! recently launched a personal finance section. Checking it out, I found a good comparison of what are probably the three most popular options: the 529 plan, the Coverdell plan, and custodial accounts.
529 Plans are recently created, state-sponsored college savings plans which allow anyone to contribute after-tax money toward a child’s eduction. This money (at least for now, although the government could change their minds, so it isn’t a guarantee) is invested and allowed to grow, tax-free, even at the time of withdrawl. The money in the plan is transferrable, so if you child does not go to college, or does not need the money for college, you can use the money for another child (or other relative).
There is a very high limit on the amount an individual may contribute. And you do not have to use your state’s plan. So, if you are willing to do some research, you may do better with another state’s plan. There is a good roundup (with links to comparisons of the state plans) here.
The Coverdell plan is similar to the 529 Plan, in that assests can grow tax-free. There is, however, a much lower contribution limit, as well as income limits on these plans. One of the benefits these plans have over 529 plans is that the money can be used for elementary and high school expenses, as well as college expenses (not just tuition).
There’s a good roundup of the Coverdell plan here.
Finally, Custodial Accounts allow adults (parents, grandparents) to contribute to these accounts, which are in the child’s name. The tax benefits to the child include: no tax on the first $850 earned, money earned above this, but below $1,700 are taxed at the child’s tax rate (usually much much lower than their parents’), earnings about $1,700 are taxed at either (a) the higher of the parents’ or the child’s tax rate if the child is under 18, or (b) the child’s tax rate, if the child is over 18.
Contributors also realize some tax breaks, as contributions to these accounts are covered under the Uniform Gifts to Minors Act, which reduces the taxable estate of the contributor.
The drawback of these accounts is that there is no requirement that the money be used for education. And, once the child turns the appropriate age (18 or 21, depending on your state), the money is his or hers to do with as they please. This forces you to raise a financially responsible child – as if we parents don’t already have enough to do!
There’s a bit more info on custodial accounts here.
Of course, you could always just hope your kid is a genius (hey, there could have been a mix up at the hospital!), or a really great ball player…