Saving For Baby's College Years

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There's never been a better time than now to to start putting some money aside for baby for college! Here's a look at some of the options available to help you choose the best for your family. Certified Financial Planner Marc S Freedman tells you which three savings plans he most often recommends to his clients - and why.

529 savings plans
When you are ready to begin putting money away for your children be sure to ask yourself - "What goal will this money fulfill?" If your intent - or the intent of other generous family members - is to put money aside for college, I highly recommend a 529 College Savings Account. This investment program is owned by a parent, but must be used to meet the needs of the beneficiary (the child). All dollars and earnings invested grow tax-free, as long as the money is used to pay for college costs.

Many mutual fund companies offer age-weighted portfolios that start with a heavier weighting towards stock based investments, and then gradually shift to a bond/cash focus as your child is closer to college years. (To learn more about 529 plans check out www.savingforcollege.com.) Do your research before investing, though - some states offer exceptional benefits if you select your own state's plan.

Another great reason to utilize a 529 plan is that the investments are owned by the parent and not the child. Why is this important? Financial aid calculations generally take a much larger allocation of a childs assets than that of a parent when calculating the family's expect financial contribution. Also, money held for a particular beneficiary in a 529 plan can be transferred to another beneficiary without tax. Just think: if Johnny decides not to attend college at age 18 and you've stashed away a bunch of money in a 529 plan, you can simply transfer the money to his sister, Jaclyn, and she can use it for college.

Custodial accounts
If it is your intent to allow a child to have access to a fund for their health, maintenance and/or support prior to their 21st birthday, you might consider a UTMA (Uniform Transfer to Minors Act) account. This account is set up in the name of the child (and uses his/her social security number) - the parent serves as "custodian" for the money until the child reaches age 21 (in most states). Parents can draw on these funds to pay for private high school, purchase a car, a computer, provide income, etc. Yet, once the child reaches age 21, they have the right to take all of the money out - and spend it as they see fit.

Tax advantages of a UTMA account are the there is a Kiddie Tax provision. If the child is under age 14, the first $800 of earnings is tax free, the next $800 is taxed at the child's rate, and the remaining earnings are taxed at the parent's rate. However, they are counted significantly when it's time to apply for financial aid.

Pre-paid college programs
If you are certain that your child will attend college in the state where you live, you might consider pre-paying a part or all of the college costs today - if your resources allow. Imagine that a private college costs $40,000 per year today, and that with costs rising at approximately 6% per year, college could cost $118,000 in 18 years. If you placed $10,000 down today, you would lock in 25% of the cost of college in today's dollars and thus your cost in 18 years would "only" by $88,500.

Many states allow for monthly payment programs or period deposit arrangements. If you've got grandparents that have hopes of helping to pay for costs, this may be a strategy worth considering - just be sure that the student will attend school in the state where you've set up your program.

Want to know more? You might also be interested in these articles:

• Financial planning and children with special needs
• Baby bargains: 10 ways to save big bucks on baby gear
• Your new little tax deduction
• Baby on a budget