A:

There are numerous options available to invest savings for a child's education:

  • State-sponsored "529" college savings plans: State-sponsored 529 plans are investment vehicles that allow you to make tax-free deposits for your child's future college costs. Depending on your plan you can either enroll directly through the state overseeing the plan or you may need to invest through a brokerage firm. You can choose between a variety of investment options for your funds according to your risk tolerance and investment time horizon (when you need to access those funds). Anyone can contribute to the plan (i.e. grandparents, extended family) and the earnings in the plan grow tax-free. You can then withdraw money tax-free from the account when it comes time to pay for school-related expenses. However if you use funds for non-college related expenses you will have to pay tax on the earning and a 10% penalty. If you're not satisfied with your plan's performance you can switch 529 plans once every 12 months. For more on this read, Don't Forget the Kids: Save for Their Education and Retirement and Choosing the Right Type of 529 Plan.
  • Coverdell education savings accounts (ESA): You can contribute $2,000 each year (for each of your children) to a Coverdell ESA to help pay for your child's elementary, secondary school and college costs. You choose how your money is invested; the money you earn on your investment grows tax-free and you do not have to pay taxes when you withdraw money from the account for qualified education-related expenses. There are income limits to be able to qualify to contribute to a Coverdell ESA. ;Anyone whose income qualifies can contribute to an account (i.e. grandparents, family friends).

  • Prepaid tuition plans: With a prepaid tuition plan you pay into an account either managed by a state or a specific college. Your funds are bundled with other contributors and invested to earn a return, which will hopefully outpace the rising cost of college tuition for the school or state which you have selected for your child to attend. As long as you withdraw money from the plan to pay for qualified school-related expenses your withdrawal is exempt from federal taxes and perhaps from state taxes as well. However if you withdraw the money for non-college related expenses the funds will be taxed and you will have to pay a 10% penalty on money your investment earned. And if your child chooses to attend a different school (if you're paying into a school-specific plan) or an out-of-state college (if you're paying into a state-managed plan) you may not be able to recover all of the money you have invested.

  • Custodial accounts: The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) accounts allow you to deposit up to $10,000 tax-free each year in an account to be used for your child's education. The account is in your child's name but managed by you until the child reaches 18 or 21 (depending on your state's law regarding the "age of majority"). While the child is a minor, money in the account(s) can be used for college or any other expenses for your child; however the account becomes the property of your child when s/he reaches the legal age of adulthood in your state and at that point can use the funds for any purpose, school or not.

  • Series EE Savings Bonds:U.S. Treasury EE savings bonds are backed by the federal government and guarantee a fixed rate of return. Bonds can be redeemed to pay for qualified college expenses and the bondholder does not have to pay income tax on the interest earned. There are income limits to qualify for the tax exemption and the bondholder must be at least 24 years old. You are limited to purchasing $5,000 in EE bonds in one year; you can purchase EE bonds in a variety of denominations (between $50 and $10,000) and buy them online through the U.S. Treasury's Treasurydirect.gov website.

This question was answered by Katie Adams.

RELATED FAQS
  1. When is the best time to start saving for my kid's college?

    I recently started a news business and would like to start saving for my 2 year old's eventual college tuition. When ... Read Answer >>
  2. How much should we put in a 529 each year to pay for college for two kids?

    If we have two kids, three and one years old, and assume we are on track for retirement, how much should we potentially put ... Read Answer >>
  3. Can I rollover an old 401k to fund my children's 529 plan?

    Hi, I am wondering if it's possible and sensible to rollover my wife's 401k Read Answer >>
  4. How do I invest for a newborn's college fund?

    My family is expecting our first grandchild this week! I want to invest $10K for her on the day she is born. I would like ... Read Answer >>
  5. What are the risks involved in a banker's acceptance?

    Learn about the different kinds of college savings accounts, how they can benefit a college saver and how to open these savings ... Read Answer >>
  6. What are the investment options for child's college?

    I am not a citizen but my daughter is a citizen. ... Read Answer >>
Related Articles
  1. Investing

    Top 7 Mistakes To Avoid On Your 529 Plan

    A 529 can go a long way to easing the burden of college education, as long as you start saving as soon as possible after your child is born.
  2. Investing

    Paying For College In An Economic Downturn

    There are many ways to fund a child's education including loans, scholarships, grants and protecting your investments.
  3. Personal Finance

    Why Ignoring Your 529 Plan Could Cost You Big

    Saving for your kids' college tuition can be difficult. Here's how a 529 plan can help and how you, too, can help your 529 plan.
  4. Personal Finance

    Stop Procrastinating! Enroll In A College Savings Plan

    The cost of sending your kids to college could be a serious financial burden - unless you get prepared. Now.
  5. Retirement

    Which Gets Priority: Retirement or College Fund?

    On a tight budget? Wondering which to contribute to – your retirement or your kid's college fund? Here's expert help on how best to allocate your savings.
  6. Investing

    Opening Your Child's First Bank Account

    Teach your children to save up to meet their spending - and saving - goals.
  7. Retirement

    The Dangers of Using Your Retirement to Pay for Your Child’s College

    Thinking about tapping into your retirement savings to help pay for college? Think again. Here are the dangers of using your 401K for college.
  8. Personal Finance

    5 Secrets You Didn't Know About A 529 Plan

    Start saving for college as soon as possible after your kids are born – and keep these details in mind.
  9. Retirement

    Tap Your IRA to Pay for Your Kid's College?

    You can raid your retirement account to pay for your child's college education – but should you?
  10. Investing

    How To Teach Your Child About Investing

    Find simple and easy instructions on how to introduce your kids to the stock market.
RELATED TERMS
  1. 529 Savings Plan

    A tax-advantaged method of saving for future college expenses ...
  2. IRS Publication 972: Child Tax Credit

    A document published by the Internal Revenue Service (IRS) that ...
  3. 529 Plan

    529 is a category of plans that provide tax advantages when saving ...
  4. 529 Prepaid Tuition Plan

    A tax-advantaged method for paying future college tuition costs ...
  5. Child Tax Credit

    A credit given to taxpayers for each dependent child that is ...
  6. Qualified Savings Bond

    Refers to a series EE savings bond which has been issued after ...
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center