Child Savings Plan

Child Savings Plan: Options

Here are some options for you to consider. The child savings plan you choose will depend on your personal financial situation.

Uniform Transfer to Minors Act Account

This type of account is set up by an adult on behalf of a minor child. Any income is taxed to the child on an annual basis. Once the child reaches the age of majority in his or her state (18 or 21), he or she assumes control over the funds in the account.

Keep in mind that if you choose this option, the amount of money in the account is counted when a determination about whether the student can qualify for financial aid is made.

529 Savings Plan

529 Savings Plans are available to residents of each state, although the specific plans vary depending on where you live. This plan does offer flexibility, since the savings can be used for any college in the United States. In addition, the savings are not taxed when they are used for qualified expenses, such as:

• tuition
• student fees
• books and supplies
• room and board

If you open a 529 savings plan and the child does not end up pursuing higher education, you will be taxed on the earnings. A 10 percent penalty will also be assessed against you.

Expenses may be higher than if you had opened an investment account and invested the money on your own. In a situation where a grandparent sets up the account, the earnings may be added into the income calculations for financial aid purposes.

529 Prepaid Tuition Program

This plan allows parents or grandparents to buy tuition credits toward the cost of attending a public university. You may qualify for a break on state taxes when you choose this plan. Again, the amount of financial aid the student may be entitled to may be lowered because he or she can access the benefits of having some tuition costs paid for through the Program.

Coverdale Education Savings Account

With this type of Education Savings Account, you can contribute a maximum of $2,000 per person per year. Your contribution is tax deductible. If you are interested in learning more about this option, a mutual fund company or a broker will be able to help you determine whether this is the right choice for you.

You can have a Coverdale Savings Account in addition to a 529 Savings Plan. If you contribute more than $11,000 in total, there may be gift tax consequences.

Consider Your Options and Make a Plan

Some parents think that if they can't put aside a significant amount of money each month that there is no point in trying to save for their child's education. In fact, even a small amount put aside in a child savings plan will grow over time, especially if you start early.

The power of compound interest can do wonders to increase the amount of your initial investment over a dozen or more years. If you can manage to put some money aside for college when your child is still in diapers, then the funds have even more time to grow before they will be needed.

Take some time to learn more details about the options available to you so that you can choose the plan that fits your budget now and your child's educational plans later on.