Reality check: Today, one year at a moderately priced private college averages $47,831, while an in-state public college averages $24,061, according to CollegeData. And heaven knows how much a college education will cost by the time your child is ready to go.
But don’t be cowed by the math. Several popular savings vehicles exist to help you accumulate the mountain of cash you’ll need.
529 College Savings Accounts
This saving vehicle lets you contribute after-tax cash to an account that grows income tax-free and, in many states, earns you tax deductions or credits — free money to add to your college savings.
The amount of money you can add to a 529 account is typically high, and there are no income limits on who can contribute. Most 529 plans are available through individual states — your state probably offers several choices. In most cases, you are not limited to sending your child to a college in the state where you have your 529 account. That is, you can live in State A, have an account in State B, and send your child to a school in State C. Check out Savingforcollege.com, which has more details.
If you’re worried about how much college will cost 18 years from now — and you should be —funding a prepaid plan is a good way to hedge your bets.
Prepaid tuition plans, sponsored by states, let you lock in college tuition rates at the time you fund the account. You can make a lump sum payment or contribute monthly.
Prepaying for college, however, will require that your state is a good financial risk and will actually stand by its college obligations. Sometimes states in money trouble freeze payouts at earlier tuition levels.
A Coverdell Education Savings Account lets you pay for any educational expenses, from kindergarten through graduate school, giving you more flexibility as your child’s needs change throughout his education. However, you’ll pay an income tax and 10 percent penalty on earnings if you use Coverdell funds for unqualified expenses.
Coverdell accounts aren’t for every parent. There are income and contribution thresholds, which make the accounts off-limits or bad investments for high-income parents.
If you will reach 59 1/2 years of age when your children enter college, you can use Roth IRA retirement funds to help pay for school. Withdrawals are federal income tax-free, if you started funding the account five years before.
Many families with more than one child use Roth IRAs, which cap annual contributions at $6,500, to complement 529 savings plans, which generally have no yearly limits but cap total contributions.