When you first begin planning for your new baby, you'll be budgeting for a lot of new expenses: diapers, daycare, new baby clothes and furniture. But don't forget to think ahead to the day your baby will go to college. You may not be thinking further than their first year at preschool now, but in 18 years, you'll be wondering how to pay that tuition. Calculating the increase in college tuition costs at five percent per year, a child who is born today will be facing a staggering college tuition bill of $175,000!
In order to ensure your child has the best opportunities available, you will need to start a savings program now for their college tuition. A long-term investment program can really help defray some of those college costs, and small amounts invested now can grow in time to large sums if you leave the money alone for 18 years and continue to contribute to the college fund.
Back in the day, your Uncle Herbie might start you off the college fund with a few hundred dollars in a savings account. These days you have many more sophisticated options, such as an Education IRA, which allows you to make tax-free deposits toward your child's education. Contributions to an education IRA are limited to $500 annually, but you can choose your own investments. If you make a return of 10 percent every year for 18 years, your $500 annually can add up to $16,670 not the full amount, but a substantial chunk of change.
Other state-sponsored plans, such as the 529 Plans, offer higher contribution ceilings for education contributions. These also offer tax shelters, but investments will be chosen and managed by your broker. And for savings vehicles with no ceiling, there is always Uncle Herbie's favorite: the traditional savings account.
Whatever your choice, you will need to get a social security number for your child as soon as possible. In addition to needing a social security number to open a savings or brokerage account for your child, it's also necessary if you want to declare your child as a deduction on your taxes, if the child is older than one year old. If your child is born in a hospital or in a birth center, you will most likely be able to apply for a social security card at the same time you fill out the paperwork for your child's birth certificate. If you give birth at home, you will need to fill out the information for both the birth certificate and the social security card at the Department of Vital Statistics. Otherwise, you can contact the local Social Security Office in order to receive a social security card later. You will need to bring evidence of your child's age and citizenship (a birth certificate will do), and also identification and social security numbers for both parents.
