Flipping Rich

For those FlippingRich readers who have kids or thinking about having kids, you’ll want to read this.  The topic du jour is college savings.   Unless you’re totally well off, you can’t expect to sit on the sidelines until one day you’ll have to fork out hundreds of thousands for the kids’ ivy-league education.  

The average annual public college tuition cost today is about $16k while private college average to $32k. The average annual increase is 5 to 8%.   There are gazillion types of college savings calculators online. Here’s an example:  http://apps.collegeboard.com/fincalc/college_savings.jsp  Or, you can use my simple math, fund an investment account with $64k to $128k today and let it compound at the rate of 5 to 8% annual, and you’ll be fine.   Of course, most of us don’t have this type of lump-sum sitting around.  So doing the monthly contribution might be the best way to go.   There are several ways or types of accounts you can set up to start saving for this purpose.  Here’s a quick look at few different options you can use to best suit your household situation.

529 Plans — state savings plans and prepaid tuition plans. Both of these are governed by the Section 529 IRS code hence the name. This can be set up directly with a mutual fund family or go through a financial instituion. There are some tax advantaged but also beware of the distribution and beneficiary designation rules. http://www.savingforcollege.com/529_plan_details/index.php?state_id=&mode=Go&page=plans_by_state

Coverdell Education Savings Accounts — a tax-advantaged education savings account that can be used for college or K-12 at public, private, or religious schools.

Custodial Accounts — basically a savings account held in the child’s name with the adult as custodian until the child reaches adult age (18 or 21 depending if the account is UTMA or UGMA, and depending on state rules). 

The main difference bewteen these options depend on how much and how often you want to contribute, tax advantages, and flexibility when you child is ready to use the money.  Use Google as your friend to do the research on your own or talk to a financial profession to see which is better for you.  The key is to start as soon as possible so you can let the money compound.