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From College
Coverdales to Trusts
The Facts on Planning for Your Child's Education
By Kendeyl Johansen
Tuition, textbooks and computers, oh my! It's hard to think of saving for college when little ones are small. But soon enough your teen will be researching colleges. To lessen future financial stress, start investing in a good college savings plan now. The sooner you save the faster compound interest will grow.
The first step for smart savings is finding out how much college will cost in order to determine necessary savings. T. Rowe Price's free Internet College Investment Calculator estimates college expenses and determines the monthly contribution needed to meet your goal. Simply enter the year a child will begin college and a specific school, and the calculator will estimate the funds needed. Further, you can choose to see how potential 529 savings will grow over the years.
The name "529" isn't user-friendly, but higher-income families will want to remember it. 529s are state-sponsored college saving accounts, which offer tax-deferred growth and tax-free distributions for education expenses.
These accounts allow investment of larger sums than other education savings programs, many allowing $200,000 plus, and 529s have no income limits on investors. Benefactors (such as Grandma and Grandpa) can shelter up to $110,000 in one year without paying federal gift tax as long as no more contributions are made for the next five years.
"The potential savings when investing in a 529 are significant, particularly compared to investing in a taxable account," says Brian J. Lewbart, spokesman for T. Rowe Price Associates.
An analysis by T. Rowe Price shows that if a parent in the 27 percent tax bracket contributes $5,000 a year to a 529 for 18 years, the money for college expenses would equal about $219,500 or 19 percent more than with a taxable account. (Assuming a return of 8 percent and a state tax rate of 5 percent.)
