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How to Save for Your Child’s Future

Jim Staats

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The early edge of summer isn’t just about warming trends and visions of beach-fueled weekends. It’s also the season of student graduation where fashion trends toward the “cap and gown” look and parents’ feelings run the gamut from pride to anxiety.

In most cases, the anxious parents are the ones whose children are years away from college or haven’t even been born yet.

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How will you be able to afford your child’s college or other aspirations in the future? What’s the best way to start saving money for kids? How do I start my kids’ savings accounts? What exactly is a gazillion dollars and is it true that could be what one year of college tuition will cost when your child is ready?

The most important point to keep in mind is if you start early, even a modest effort at saving, when done consistently, can produce robust dividends.

Consider this example: Setting aside $50 a month from the moment your child is born can yield about $20,000 by the time that child reaches 17, assuming a 7 percent return on investment. Quadruple the monthly savings and you’re looking at a nice $80,000 college nest egg.

And if you take to heart national statistics, some sort of savings mechanism will be necessary. According to the Bureau of Labor Statistics, the tuition component of the Consumer Price index (CPI) increased by 8 percent per year, on average, from the years of 1979 through 2001. In plain terms, a child born today can expect the cost of college to be three to four times current costs by the time he or she is ready to enroll.

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Now take a deep breath as a wealth (excuse the pun) of options beyond the basic savings account are at the ready.

529 College Savings Plans

Defined: Similar to an IRA or 401(k) plan, 529 plans allow parents to save for a child’s education tax free through a variety of investment options. Think of it as a state-sponsored piggy bank.

Pros: Very hands-off with automatic deposit; little monetary restrictions; little financial aid impact; sometimes tax breaks in addition to being tax-free

Cons: Funds restricted to higher education; rides with stock market fortunes; simplicity balanced by enrollment and maintenance fees.

U.S. Treasury Bonds

Defined: Savings bonds issued and ensured by the government and exempt from state and local taxes.

Pros: Less risk than savings tied to the stock market; inexpensive; other tax advantages available if money used for tuition and family is under income limits

Cons: Unlikely to keep up with rising tuition rates; early withdrawal penalties; old-fashioned hardcopy format

Custodial Account

Defined: Account created at a bank, brokerage or mutual fund firm that is managed by an adult for a minor under the age of 18 to 21.

Pros:  Good option for broader savings purposes from college to a car or summer camp; advantageous tax-wise as account is tied to the child’s Social Security Number and, therefore, tied to the lower child’s rate

Cons: Tied to risk of securities; automatic transfer to child at adulthood

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Coverdell Education Savings Account

Defined: Also known as an Education Savings Account (ESA), these tax-free accounts are created for education expenses but do come with contribution and distribution limitations.

Pros: No taxes on account growth or withdrawal; control over how money is invested; use not confined to college education

Cons: Annual contribution cap of $2,000 per child; availability based on income qualifications; contributions allowed only until child’s 18 th birthday; taxing begins for funds untouched by the time the child, er, adult turns 30

Obviously, the old adage “one size fits all” doesn’t apply when it comes to this decision. Every family should choose an option based on individual goals and financial means.

One fact remains, though: The earlier you start saving for your child’s future, the better.

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