I know you fear these words, this is the when you plug your ears with your fingers, start singing at the top of your lungs and visualize a golden bubble encasing you in its warmth and protection. I also know that as New Yorkers you are probably investing all your “extra earnings” in your rent. I think most of us come at saving for college from the prospective of “why bother?”
When my four year old goes to college, let’s say she goes to Harvard (she’s really good with Magnatiles), it will cost $486,851, including room and board (find out your magic number here). I won’t even tell you what my monthly contribution would need to be to cover that cost. Let’s just say, baby ain’t going Ivy League. But, instead of abandoning all hope I realize that we, the parents far and wide, have been coming at this the wrong way. We can’t start with that paralyzing number and work backward, as our college Trig teachers would have had it (OK not trig, Algebra For Everyday Life, but whatever). We need to simply start from where we are. Start with what we can do, save what we can manage, because there are options for us and our kids.
I’ve searched around and found the most straightforward breakdown of various savings options at Babycenter.com below. If you want to spend the next two hours (could be longer, the pages seemed infinite) of your life pouring over options you can go to CNNMoney. I prefer the short cut. Once you know what option sounds right to you, you can maximize your time and research. Two quick things: first, there are 529 plans for both public and private institutions and, despite popular misconception, they don’t limit the state where your child can go to school. Second, if it’s a choice between saving for college and saving for retirement, choose retirement. Your kid can get student loans, old fogie loans are much harder to come by. Plus, you don’t want your college grad searching out the cheapest nursing home to put you in. Remember what your first apartment was like after college? Imagine that without the booze.
College Saving Options
529 College savings plans These are investment accounts that allow you to set aside money for your child’s education and let it grow tax-free. The federal government won’t tax your withdrawal as long as it’s used for higher education. Any family can contribute to a 529 account regardless of income, and there’s a lifetime maximum contribution (the amount varies from state to state, ranging from $235,000 to more than $300,000). The best part: You can often start an account with as little as $25, and you can use the money in a 529 plan at any accredited college or university in the country. For more information, see Saving for college: 529 plans
Prepaid tuition plans These are investment accounts that allow you to pay for your child’s future college tuition (or a portion of it) at today’s prices. If you have enough money now, you could pay for a complete four-year degree that your child won’t use for another 18 years. Or, if your budget’s more modest, you can prepay a portion of your child’s college expenses. Prepaid tuition plans are administered by individual states and most can only be redeemed at public colleges and universities in that state. In many cases, you or the student beneficiary of the account must also live in that state. If the student opts to go out of state, plans typically pay the average in-state rate — and the family makes up any difference. For more information, see Saving for college: Prepaid tuition plans
Coverdell education savings accounts (ESA) Coverdell ESAs function very much like an IRA but for education, not retirement purposes. You make a contribution of up to $2,000 a year with post-tax dollars. The money grows tax-free, and neither the contribution nor the interest is taxed when you make a withdrawal, as long as you use it for education purposes. For more information, see Saving for college: Coverdell education savings accounts (CESA)
Custodial accounts In very basic terms, a custodial account is a savings account in your child’s name that you control (if you’re the custodian) until he reaches legal adulthood (18 to 21, depending on where you live). You decide how much to put into the account, how the money is invested, how earnings are reinvested, and when to take money out to spend on your child’s behalf. You can deposit cash, savings bonds, and other securities in a custodial account. The first $850 of earnings each year are tax free, and the next $850 are taxed annually at your child’s rate — generally 15 percent. Any earnings beyond that are taxed at your rate. Withdrawals are subject to federal tax as well. For more information, see Saving for college: Custodial accounts
IRA and Roth IRA accounts A traditional IRA and a Roth IRA are investment accounts that allow you to save money for retirement or college while avoiding significant taxes. Traditional IRAs come in two forms — deductible and nondeductible. Your eligibility for a traditional deductible IRA depends on your income and whether your employer has a retirement plan. In a deductible IRA, your annual contributions are tax deductible, but when you withdraw money from the account, you’ll be taxed on both your contributions and your earnings. In a Roth IRA, your contributions are not tax deductible, but your earnings are tax-free if you withdraw them after the required five-year holding period and use the money for qualified expenses such as college tuition. For more information, see Saving for college: Individual retirement accounts (IRAs)