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Kick Off College Savings Before a Child Is Born

Reyna Gobel

Brian and Elisa Keller's unborn child doesn't have a name yet - but does have a college savings account.

The Washington couple opened a GradSave account, which allows family and friends to donate money online to a college fund, because many people wanted to contribute to their child's future.

Registry services such as GradSave allow parents to transfer money accumulated on the gifting site into a 529 plan account, a tax-advantaged college investment account, of their choosing.

The Kellers aren't the only ones getting an early start. According to GradSave spokesman Eddie Pradel, it's common for parents to open GradSave accounts before a child is born in anticipation of events such as baby showers.

[Avoid common mistakes parents make when saving for college.]

Gift accounts, which can be for anyone, don't require a name or social security number to open. In the account the Kellers opened, their son is "Little Man Keller," and his photo is an ultrasound image.

But 529 plans are a bit more complicated. Opening a 529 plan account requires the social security number of the beneficiary, the person entitled to use the money in the account.

Parents who want to start saving for an unborn child's college tuition typically tackle the social security number problem in one of two ways.

"Some parents open a 529 plan before the baby is born in their own name and transfer the gifts there," says Pradel. "After the baby is born and they receive a social security number, they then change the beneficiary of the 529 plan to the child."

[Check out ways to save on college costs.]

Colorado-based financial planner Mitch O'Hare started a 529 plan account for his daughter before she was born. He designated himself as both the account owner and beneficiary. Once his daughter had a social security number, he changed the beneficiary to her.

The other way parents handle the social security number problem is to leave gifts received from a baby shower or other event in a GradSave account until the baby is born, says the registry's Pradel, and open a 529 plan in the baby's name once the child has a social security number, then transfer the gifts. The Kellers have already selected the 529 plan they will open once the baby is born and has a social security number.

O'Hare encourages his clients to start saving for college before their children are born.

"Why not just start funding a 529 plan early?" he says. An earlier start means parents have more time for compound interest to accrue.

He predicts parents of children born today will need $150,000 for four years of education at a state school.

If parents are able to earn 8 percent annual interest on their investments, they could accumulate roughly $150,000 by contributing $310 per month for 18 years. If they wait 10 years to start saving for college, the monthly contribution would be have to be $1,100 to get close to that amount.

Parents saving $100 per month from the time the baby is born could save for nearly a third of their child's cost of attendance.

Would-be parents who want to get a jump on college savings should be careful, however, about starting a 529 plan if they have yet to conceive. For varying reasons, sometimes plans to have children don't work out.

While the money in a 529 plan can be used for other family members such as nieces and nephews or for the parents themselves, there is a 10 percent tax penalty, plus income tax on earnings, if the money is later withdrawn for a noneducational purpose, he says.

[Find more tips and advice to help you save for college.]

For the Kellers, having an option to fund their child's education before birth was about continuing a family legacy.

"Both of us received savings bonds growing up from family members that paid for our education," Brian Keller says. "There's only so many things we need for our nursery. Having a baby shower registry that includes college savings feels like the right thing to do for our son."

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.

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