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The Money Prof
Sunday, September 30 2012
Saving for my child's college education - Oy Vey!You are perhaps in your late 20s or 30s (maybe 40s) and life is definitely a challenge. Housing, food, shelter, auto, credit card payments, day-to-day living costs are a fact of life. Little Bobby is turning 2 years old and not a penny has been saved for his future college. You think to yourself, how do I begin saving for what will eventually be a multi-thousand dollar cost. Here are some steps you can take to get started: (1) calculate how much a 4-year college education will cost (include the type of college - public or private; residential or live-at home experience, incidental costs); (2) what will be the parent's contribution? Would you like to pay for it all, or have the child shoulder part (or all) of the cost? (this is an article for another month); (3) how will the cost be funded - cash or loans? (4) based upon the type of investments you decide to make and their investment return, what would your monthly contribution have to be? (5) what are the investment alternatives?
There are several investment alternatives that families can consider. Many families open up a qualified college savings account through their state. Most states (including Maine) have a 529 College Plan. Monthly contributions or lump sums of money can be deposited into this account. Any investment income (dividends and capital gains) are not taxable while in the account. When the child needs to withdraw the funds to attend college, the funds come out tax-free (no Federal or State income tax). You can also shop around for the best 529 plans from other states. It doesn't matter where you open up an account. To get information on Maine's 529 Plan, contact the Finance Authority of Maine (FAME) in Augusta. Typically, the owner of these accounts are the parents, but sometimes it might be more advantageous if the grandparents can be the owners, which may benefit the college financial aid package that one receives. Speak to your adviser about this. Another alternative would be to invest funds through UGMA (Unified Gift Minors Act). There are several positives but also negatives about using these accounts for college education. The big negative is that the funds contributed are non-revocable and belong to the child. Once a child reaches 18, they belong to the child. He/she can do what they want with the funds. The advantage is, if the child does not go to college, the funds (which have been growing if invested properly) will increase in value and the child can now have funds to do what they want to do. A third alternative, is to use Roth IRAs or even non-retirement (regular accounts) to save money. The non-retirement (regular) accounts are taxable on an annual basis. The most important part of saving for college education, is to get started early and do something.......
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