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There are many ways to start a college fund for your child. The two most common methods are Qualified Tuition Programs or Coverdell Education Savings Accounts. It is best to start these when the child is young as these programs gain interest and it makes it easier to reach the financial goal by starting earlier.
You can calculate the average cost of your child’s college by taking into account the annual increase of inflation adjusted average tuition and fees for both public universities and colleges. Expect to pay more if your child is going to a private university as private universities have larger tuition fees.
Qualified Tuition Plans also known as 529 plans, are often the best choice for many families. Every state has a program to prepay future higher education that allows for tax relief. For one, a prepaid education arrangement is essentially a plan that buys your child’s education at today’s costs through the purchase of education credits or certificates. This type usually limits the student’s choice of schools to those within the state but both private and public are available under this plan. With an Education Savings Account you can make contributions to an account that is going to be used for future higher education.
Unlike some other tax-favored higher education programs a 529 plan doesn’t limit the benefit to just tuition but extends it out to room, board, and books.
When setting up an account, remember that there is the account owner and the beneficiary which is the individual that will be receiving the benefits of the college fund. Remember that you can only have one beneficiary per account so if you have more than one child you would want to set up more than one account.
Unfortunately, contributions made by an account owner are not tax deductible for federal income tax purposes, however, distributions from the fund are tax-free to the extent they are used for qualified higher education expenses. If distributions are used in other ways they are taxable only on the portions that represent earnings.
If you have more questions on this topic feel free to call us.