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Money SavvyMaking College AffordableWhen it comes to your child's college education, the most important thing you can do is start saving now. What follows is a rundown on strategies for saving and paying for college: Mutual Funds. One of the easiest ways to save is by making automatic monthly or quarterly contributions to a mutual fund. Mutual fund investing has two main advantages: professional money management and diversification. If your children are young, consider investing in growth stock funds until your child reaches about age 14. Then, each year, move one year's tuition into less risky investments, such as money market funds, bond funds, or certificates of deposit. Prepaid Tuition Programs. Forty-two states have prepaid tuition programs, which allow you to prepay tomorrow's tuition at today's rates. This approach protects you from excessive tuition hikes, but it doesn't cover room and board, and it may reduce your child's eligibility for financial aid. Education IRA. The new Education IRA is another way to save for your child's education. You can make annual contributions of up to $500. These contributions aren't tax-deductible, but earnings grow tax-deferred and qualified withdrawals can be taken free. Roth IRA. The new Roth IRA could become the budding scholar's best friend. In fact, if you have a retirement savings plan such as a 403(b), the Roth IRA may be better for educational purposes than the Education IRA. Here's why: The Education IRA limits your contributions to $500 a year. Earnings are tax-free if used for college expenses, but the IRS will penalize you if you haven't used the money for educational purposes by the time your beneficiary turns 30. By contrast, the Roth IRA has fewer limitations. You can contribute up to $2,000 a year, and you can withdraw your contributions (but not your earnings) at any time for any purpose without penalties or taxes. Uniform Gifts to Minors' Accounts: Grandparents often attempt to offset the cost of college by opening a UGMA in a grandchild's name. There's a tax break on money contributed, but the account may actually reduce your child's eligibility for financial aid, because a greater portion of a child's savings is expected to be applied to tuition than parents' savings. |
