As you begin planning for your new baby, you’ll be saving money for a lot of new expenses: Diapers, daycare, new baby clothes, furniture and more. However, don’t forget to plan ahead for 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 for 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 $130,428 per year! In order to ensure your child has the best opportunities available, you will need to start a savings program now with a child savings account 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.
In years past, family would have help start a college fund for little ones by depositing a few hundred dollars in a savings account. These days, there are more sophisticated options, such as Coverdell Education Savings Accounts (ESAs). These accounts allow you to earn higher returns than a traditional savings account and withdraw the money tax-free (as long as it’s going toward qualifying expenses).
Contributions to a Coverdell ESA are limited to $500 annually, but you can choose your own investments. Additionally, the money may be used toward elementary and secondary school expenses, in addition to college tuition and related costs.
A 529 Plan is a state-sponsored savings account for higher education costs. These accounts offer higher contribution ceilings for education savings, as well as tax advantages, but investments are more limited and are usually handled by a broker or financial advisor. Plan types and availability vary by each state, so it’s important to investigate the accounts available in your state and their terms before opening one.