It's the beginning of the school year and you're thinking about your child's future education. Your child is bright and will be going to college, so the time to start planning is now. Many parents begin planning for college early to create an education savings account for their child's education. How to save for your child's education is the big question that is asked, as there are many different ways to save for educational purposes. One potential problem with an education savings account is taxation and asset responsibility as it pertains to financial aid eligibility.
There are some different methods parents and grandparents can use to save for a child's education. It's important to consider taxation, eligibility and growth aspects of the different savings plans. Many financial advisors recommend plans that are more aggressive and risky in the early childhood years, but converting over to more conservative tactics in the years that are closer to the start of college. One reason is that there is less money to risk in the beginning, so higher risk investments are acceptable. In years closer to the start of college, any education savings account risks should be minimized to conserve the larger amount of savings accumulated.
There are four major methods used to fund college expenses:
1. Savings plans - Coverdell Education Savings Account (CESA), state operated Section 529 college savings plan, UGMA/UTMA custodial account, traditional or Roth IRA, 401(k)
2. Investments - stocks, savings bonds, life insurance, trust funds
3. Borrowed cash - loans
4. Grants, gifts and scholarship money - government and other scholarship programs
Some savings plans jeopardize the child's ability to qualify for various grants, gifts or scholarships based on need because the savings create too much in the way of assets in the child's name. This is where a registered financial planner can help with decision-making with regard to the various types of savings plans. In simple terms, savings earn interest while borrowing costs interest. College tuition savings plans should be set up so that the greatest tax advantages are realized. Saving can cut costs by about half the costs of borrowing, especially when savings accounts are started when the child is born.
Common recommendations about college tuition savings include:
1. Start early
2. Invest carefully
3. Diversify investments
4. Keep in parent names
5. Avoid capital gains shortly prior to college
6. Use tax-advantaged accounts
Some precautions include keeping college tuition savings assets in the parent's names. If accounts are in the child's name, once they reach the age of majority, they can do whatever they wish with the accounts. Tax rates may also be more favorable if assets remain in the parent's names. High assets in the child's name may negatively affect applications for aid, grants or gifts. Students can file for assistance using FAFSA, the Free Application for Federal Student Aid. All college tuition savings plans are subject to future changes that Congress may implement; always work closely with your financial advisor to deal with changes.
No matter which course of savings you select, the objective is to have sufficient money ready to pay for college expenses that are jumping higher at roughly twice the rate of ordinary inflation. Careful planning and consultation with a registered financial advisor can help you deal early with potential problems so that this worthy goal can be achieved on best terms. For more information about investing go to http://www.savvywomeninvesting.com/.
There are some different methods parents and grandparents can use to save for a child's education. It's important to consider taxation, eligibility and growth aspects of the different savings plans. Many financial advisors recommend plans that are more aggressive and risky in the early childhood years, but converting over to more conservative tactics in the years that are closer to the start of college. One reason is that there is less money to risk in the beginning, so higher risk investments are acceptable. In years closer to the start of college, any education savings account risks should be minimized to conserve the larger amount of savings accumulated.
There are four major methods used to fund college expenses:
1. Savings plans - Coverdell Education Savings Account (CESA), state operated Section 529 college savings plan, UGMA/UTMA custodial account, traditional or Roth IRA, 401(k)
2. Investments - stocks, savings bonds, life insurance, trust funds
3. Borrowed cash - loans
4. Grants, gifts and scholarship money - government and other scholarship programs
Some savings plans jeopardize the child's ability to qualify for various grants, gifts or scholarships based on need because the savings create too much in the way of assets in the child's name. This is where a registered financial planner can help with decision-making with regard to the various types of savings plans. In simple terms, savings earn interest while borrowing costs interest. College tuition savings plans should be set up so that the greatest tax advantages are realized. Saving can cut costs by about half the costs of borrowing, especially when savings accounts are started when the child is born.
Common recommendations about college tuition savings include:
1. Start early
2. Invest carefully
3. Diversify investments
4. Keep in parent names
5. Avoid capital gains shortly prior to college
6. Use tax-advantaged accounts
Some precautions include keeping college tuition savings assets in the parent's names. If accounts are in the child's name, once they reach the age of majority, they can do whatever they wish with the accounts. Tax rates may also be more favorable if assets remain in the parent's names. High assets in the child's name may negatively affect applications for aid, grants or gifts. Students can file for assistance using FAFSA, the Free Application for Federal Student Aid. All college tuition savings plans are subject to future changes that Congress may implement; always work closely with your financial advisor to deal with changes.
No matter which course of savings you select, the objective is to have sufficient money ready to pay for college expenses that are jumping higher at roughly twice the rate of ordinary inflation. Careful planning and consultation with a registered financial advisor can help you deal early with potential problems so that this worthy goal can be achieved on best terms. For more information about investing go to http://www.savvywomeninvesting.com/.