Saving for Your Child’s College

One of your primary responsibilities, when you welcome a child into the world, is preparing them for adulthood. Of course, you feed them, clothe them and house them. You make sure they have a good education, and you instill in them with a solid sense of right and wrong.

Many families, though, want to go a little further and save for the time a child enters adulthood. These savings will often be in the form of a college fund, but that’s not the only choice. There are ways to prepare early for a child’s wedding, their first home, or even a mission trip overseas. The direction you take will depend on your resources, your location, and the likely end use of that money. In the next couple of weeks, we will discuss your options as you prepare for a child to go into the world.

Will your child go to college?

Do you come from a family where higher education is the norm? Are you personally committed to seeing your child go to college? If so, you can assume you’ll need to plan for college expenses.

The upside of saving for college is that you know when you’re going to need the money. The downside is that you have to begin at a time when your finances are already stretched tight, with a mortgage, car payments, groceries, and all the costs that come with raising a family.

Yet, the earlier you start, the less of an uphill trudge you will have. College costs rise faster than just about any area of the economy, with the possible exception of health care. To put it bluntly, when you save for college, you are fighting inflation. Fortunately, there are ways you can save without having to pay taxes on the growth of your money.

The first is called a 529 plan, which is organized by your state and named after section 529 of the Internal Revenue Code (26 U.S. Code § 529). Typically, your state will team up with an insurance company or mutual fund company to help pick investments within the plan.

Because they are state plans, you need to look into the details for your state. For example, some states offer tax credits for investments made into the plan, while others don’t.

The other major college investment tool is known as a Coverdale Education Savings Account or ESA. These plans are covered by section 530 of the Internal Revenue Code (26 U.S.C. § 530)

ESAs are another way to grow your money tax-free. The main advantage they offer over a 529 plan is that they let you invest in a wide range of stocks and bonds (if the custodian allows). In a 529 plan, your choices are typically limited to mutual funds. The disadvantage of an ESA is that you’re limited to an annual investment of $2,000.

So, for instance, if you’re investing $150 each month, you might pick an ESA, but if you have grandparents and other family members kicking in, you might go with a 529 plan. Or if your situation is a little different—and many, many situations are—you might be interested in a hybrid approach.