SAVING FOR COLLEGE

Once you’ve gotten your own finances in order and have an idea of what it’ll cost for your child to go to college, it’s time to start saving for college using a tax-favored plan.

Setting up a college fund is simple—you just need to know which fund is the right choice for you and your savings goals. You can also work with an investing professional to help you pick a savings plan and walk you through your investment options.

An Education Savings Account (ESA) works a lot like a Roth IRA, except it’s for education expenses. It allows you to invest up to $2,000 (after tax) per year, per child. Plus, it grows tax-free! So, if you start saving $2,000 a year when your child is born, by the time they turn 18, you’d have invested $36,000.

It’s hard to say exactly what the rate of growth is with an ESA because it varies based on the investments in the account. But if you invest in good growth stock mutual funds and get an average return of 10–12%, that $36,000 could grow to around $112,000 by the time your child is ready to go off to college. Congrats, you more than tripled your investment, and now Junior doesn’t have to worry about paying for tuition!

I like the ESA because it’s likely a much higher rate of return than you’d get in a regular savings account - and you won’t have to pay taxes when you withdraw the money to pay for education expenses. An ESA isn’t just for college tuition either. It can be used for K-12 private school tuition, vocational school or things like textbooks, school supplies or tutoring. And if your child doesn’t end up needing the money, you can transfer it to a sibling so they can use it for their school expenses.

• There’s a variety of investment options.
• Your money grows tax-free.
• There’s a higher rate of return than a regular savings account.
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• Contributions are limited to $2,000 per year.
• You must be within the income limit to qualify.
• The amount must be used by the beneficiary by age 30.