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Most people wait too long to start setting aside money for their child's college costs.

But how do you begin to save?

Many claim that putting money in your child's name could mean less financial aid. Although most colleges expect students to utilize 35% of their resources and only 6% from their parent's resources, most aid comes from student loans. Consequently, putting the money in your name instead of your child means they could borrow more and fall deeper into debt. Meanwhile, if the money is in your child's name, it will be taxed at their lower rate( the first $650 in unearned income is tax-free, children over age 14 pay capital gains tax at rates as low as 8%).

 

There are a few different strategies you can use to assist you when the time comes to pay for your children's college education.

But what strategy is the best? A 529 Plan, a Roth IRA, or Education Saving Account? Read on to learn more about these options.

A 529 Plan is an investment operated by a state designed to help families save for future college costs. As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant (Section 529 of the Internal Revenue Code). Most colleges expect students to utilize 35% of their resources and only 6% from their parent's resources. The majority of financial aid for students comes from student loans. There are two general types of 529 Plans: prepaid program and savings programs. The states offer prepaid programs and 529 Plans are offered through investment companies. You as the account owner may get tax breaks...your investment grows tax-free and qualified distributions are federally tax-free as well. Amounts as high as $250,000 can be put into the 529 Plan (per beneficiary).

Considering a Roth IRA is one strategy. As long as your child has $3,000 a year in earnings, he or she could contribute that much to a Roth IRA. The money will grow tax-free. He/she will be able to pull the contributions out penalty free (not including earnings). In addition your child with earned income can contribute and deduct up to $3,000 a year into a Traditional IRA. The money grows tax-deferred and can be pulled out at a typically lower tax rate of about 15%. The penalties associated with early withdrawal would not apply since the money is being used for college.

An alternative to the above options is the new Education Saving Account. The Education Savings Account lets you contribute up to $2,000 per child under the age of 18 each year, provided the parents fall within the parameters of the guidelines. Even if the parents are not eligible to contribute, the grandparents may be. The money grows tax-deferred and can be withdrawn tax-free to pay for tuition, fees, room and board, and equipment. This money can be used to pay for expenses of primary and secondary school as well.

A Foresters Equity Registered Representative can assist you in determining where to invest these monies. Our relationship with over 60 mutual fund companies will provide you with wide array of choices. Mutual funds may be the best choice for college savings. Any of the strategies above could meet your needs, it is a matter of determining the strategy that suite your objectives.

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