September 10, 2013

How To Save For Your Child's College Education


It might be hard to imagine your two-year-old getting out of diapers, let alone getting into college. But according to investment experts, it's never too early -- or too late -- to think about saving for your child's college education. 

The key to investing for your child is a close, personal relationship with your gut. Do you toss and turn over whether your checkbook is balanced to the last dime? Maybe investing your child's college money in the stock market isn't for you. Are you the conservative type? A long-term investment in growth stocks might be a good idea. After all, it's worked before. Just like potty-training. Here are some answers to basic investing questions to help you get started.


1. Is it already too late?

Even if your child is twelve, she has about five years to go before she enters college, so you still have time to invest.   You may want to consider investing a lump sum or putting away more than usual every month. It's never too late to start. 

Don't forget the magic of compounding interest -- that economic pixie dust that turns $100 a month into $30,000 (invested over 15 years at an assumed 8% pre-tax return). The sooner you start, the better.  

2. What should I do first?

Develop a savings plan. Figure out what kind of college you want your child to attend (public education, of course, is considerably cheaper than private education) and how many years you have before she'll pack her bags to go. Then ask yourself how comfortable you are with risk. Remember that time is on your side. There's a lot of peaks and valleys you go through,Time tends to smooth them out. 

3. How much do I need to save?

At the current college inflation rate of 6%, a private four-year school could cost as much as $180,211.59 total by the time your two-year-old is ready, At an assumed 8% pre-tax return, you'd have to put away $362.35 a month to foot the bill.  

4. What if I can't come up with enough money every month?

Be creative. Ask grandparents, uncles or aunts to contribute to your child's college fund in lieu of toys. Ask older children to contribute some of their earnings if they're out of school and working. And don't forget that unexpected lump sums -- like a bonus from work or an inheritance -- can be invested along the way.  

5. Where do I put my money?

Your child's age and your tolerance for risk are the most important factors here. If you can stand the heat and your child is a toddler, growth stocks or stock funds that invest in them may be the best way to go. As the child gets older, you may want to reduce your risk by diversifying into bonds or money market funds.  

6. Are there special tax arrangements I should consider?

Look into a custodial account. A Uniform Transfers to Minors Act (UTMA) account or a Uniform Gift to Minors Act (UGMA) account transfers assets to your child's name and social security number. That means the profits from the account are taxed at a significantly lower rate than they might be if they were assigned to you.  

Until your child reaches age 14, the first $650 earned is tax free and the next $650 is generally taxed at the child's rate (which is usually 15%). Above $1,300, it's taxed at your highest marginal rate. After age 14, all earnings above $650 are taxed at the child's rate.  

An individual can transfer up to $10,000 per year into one of these accounts without facing federal gift taxes. Funds from these accounts can be used by the custodial parents within the limits of the law "for the good of the child" until the child reaches the age of 18 (or 21, depending on the state). Then comes the catch. At that point, the money becomes hers and she can use it for whatever she wants. For some parents, this may be a decisive deterrent.  

7. How vigilant should I be about monitoring my accounts?

If you are an investors then you need to take a close look at how stocks are doing once a year. Decide then whether to realign finances. But don't move things around every time the stock market sneezes. You always have to go back to 'what was my goal,Is it a long-term investment? That means day-to-day fluctuations don't affect it. 

If you're nervous about how your fund will weather rough seas, take a look at charts of its performance during stormy financial times (2010, for example). Your once-a-year revisit shouldn't be about panic, it should be about fine-tuning. Is your fund as aggressive as you want it to be? Is it time to diversify your holdings?