How to Invest for Your Child's College Education
Using money you can put aside and your child's own contributions from allowance and birthday funds, you can create a tidy nest egg for your child's education.
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Things You'll Need
- Financial Calculator
- Brokerage Accounts
- Savings Accounts
- Paper And Pencils
- Personal Financial Software
Instructions
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Start early and let compounding work for you - that is, earning interest on interest. The more you can save now, the less you will have to set aside later.
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Buy a mix of investments such as mutual funds, savings bonds, individual stocks and corporate bonds.
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Look into setting up an education IRA (Individual Retirement Account). Contributions are not tax-deductible, but your investments grow tax-free until you withdraw them.
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Find out whether the state in which your child will likely attend college offers a state-backed tuition-savings plan.
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Check out mutual funds that specialize in college-tuition savings. They won't ask for big monthly investments.
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Ask relatives who regularly send birthday, Christmas or Hanukkah gifts to consider putting a part of the money into savings bonds or other investments for your child.
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Encourage your child to contribute 10 percent of a weekly allowance or income from part-time work to the investment pool.
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Give your child a role in making decisions about the investments to learn about and appreciate sound personal-finance habits.
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Start searching for college grants, scholarships and work-study deals before your child completes his or her junior year of high school.
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Tips & Warnings
In addition to using an education IRA, you may be able to take early withdrawals without penalty from your other IRAs to pay for college costs.
Your child should avoid taking out student loans unless there is no other way. It's a burden to begin paying back debt soon after graduation.
If it isn't out of the question, ask your child to look into the active-duty military or the guard or reserve component of the armed services. Enlistees receive the promise of a large college tuition subsidy.
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Comments
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Nov 22, 2005
I disagree! If your child decides not to go to college because he doesn't want to pay back loans later, he is missing out on an education. He'll probably earn much less in his lifetime - unless he learns a trade - so the education and loans do pay off! -
Nov 22, 2005
You CANNOT enroll your child BOTH in an Education IRA and a state-sponsored pre-paid tuition plan at the same time, but your child CAN have a ROTH IRA if he/she is earning an income,and files an income tax statement. A parent can also use his/her OWN ROTH IRA to finance your child's education. The key is to start as EARLY as possible and to CONTINUE maxing out your annual contributions. It is a good idea to set up regular automatic monthly deductions to your broker and the state for these accounts.
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Nov 22, 2005
Check out the QSTP. Anyone can put in any amount of money for a child. Earnings are tax-deferred, and the principal is not taxed when withdrawn. These plans have lots of benefits. Talk to a tax professional if making large contributions and other details.
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Nov 22, 2005
Consider opening a Uniform Transfer or Gift to Minors account with a mutual fund family. Most of the earnings are taxed at the child's rate - the first $700 is tax-free, the next $700 is taxed at the child's rate.
