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Nothing sends parents into a panic so much as realizing that
both your child AND the permanent markers are missing, and thinking about how
to save for your kid's college. Planning aficionado that I am (but not a tax advisor, I will
disclose for legal reasons), I bought a book on investing in my last trimester,
but got so caught up with moving and nesting that I never got to read it. By
the time I had the baby, I was too tired to think about how to invest for my
kid's college, but made the decision to set aside some money every month and
just deal with it later.
I started with $120 dollars every month, along with any
money that was given to me in red envelopes by Chinese family and friends. By the time my son turned one, I had finally mastered
finding time to play with him, take a shower, and make it to work on time, and
finally had a moment to sit down and think about how to invest the $1,700
dollars I had saved up for him.
Not knowing much about finance, I opted to go with a 529
Education account. These plans are set up by the state, and use large mutual
funds by companies such as Vanguard and TIAA CREF to invest the money for you.
The funds can be taken out of your pre-tax salary, and education-related withdrawals
are also tax-free, meaning you can save a nice chunk of change in the long run
in taxes alone.
Now, consider this: the more money you invest up front, the greater your interest is, so if your parents are setting aside money for their grandkid's education, you could ask them to put in the money now.
Most of these types of funds say they can average about 7
percent interest over the years, meaning that my annual investment of $1,440.00
plus compound interest, would add up to $49,779.90 by the time my boy is ready for college. In short, we could
earn an additional $25,299.9 in 17 years!
The other benefit of
these accounts is that this form of income bears little influence on the
student's FAFSA, and only as much as 5.6
percent of the value is deemed part of the expected family contribution. If the
grandparents own the account, the value of those withdrawals jumps to 20
percent, and can put a ding in the financial aid available to the student. This
loophole can be avoided by transferring the account to the student.
Now, consider this: the more money you invest up front, the
greater your interest is, so if your parents are setting aside money for their
grandkid's education, you could ask them to put in the money now. Starting with
$4,320.00 (three times my starting amount) instead of $1,440.00 would add
roughly $10,000.00 to that final amount.