Friday, September 7, 2012

Starting an Education Fund

This textbook will cost $5,000 in 2030

Estimated Planning Time: 2 hours
Materials: Budget
Project Difficulty: Hard

Once you have an emergency fund, you are fully funding your retirement, and you have paid off all of your non-mortgage debt you might want to consider opening an education investment account.  I realize I might have lost a majority of the population with those conditions, so the first step is understanding why those conditions are applicable and why you might start saving for college before meeting them.

First of all, there are some advantages to having money in a retirement account, at the moment these funds are not included in financial need calculations.  While college loans are not a preferred method of paying for a college degree, it is still possible whereas you can't get a loan to pay for your retirement.  Paying off high interest debt now is also a much better idea, since it is far from a certainty that the tax advantaged income in a qualified college investment plan will exceed your interest expenses.

With that said, there is something about saving for your children's education that might motivate you to save that extra $50 a month.  The ancient Stoics actually based certain concepts regarding morality on the love parents naturally have for their children, so it might be a good idea to take advantage of this natural motivation.  Take a long look at your budget and decide how you feel about it.

Once you have decided to open an account, you need to decide what type of account to open.  First you should find out what different options your state offers.  It could have a prepaid plan or offer a discount if you invest in a 529 and your child ends up going to an institution in your state.  Of course, there is some risk that your kid won't got to college in the state you currently live in, so understand what your options are if this happens.

After examining your state's plans, you can also choose a different state's 529 plan or open a Coverdell Education Savings account.  These plans are similar in that you are contributing after-tax funds and then any investment income is tax free as long as the funds are used for qualified college expenses.  However there are some major differences in terms of contributions, qualified expenses, fees, and investment options, so things get complicated quickly.  Just take things slowly, get information from plans you are interested in and do your research.

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