Saving for College
We know, some of you might still be paying off your college education, but it’s time to start planning on how you’re going to pay for your child’s education. And this is definitely something 
you can’t start too early —the cost of college increases at an average rate of 6% per year.
The Tax-friendly Way
Two of the most popular, and tax-friendly, ways to save for college are Coverdell educations savings plans and 529 college savings programs.
Coverdell Education Savings Accounts
With a Coverdell account, you can save for college expenses, plus elementary and secondary educations as well. You can contribute $2,000 a year to an education savings account per child, from birth until they turn 18.
The contributions aren’t tax deductible, but the earnings accumulate tax deferred. Withdrawals to pay for qualified education expenses are free from federal taxes. Keep in mind that there are income eligibility restrictions. Stop by your credit union to learn more.
529 College Savings Programs
In general, a 529 college savings program is a tax-free way to save for future college expenses. Qualified withdrawals of earnings are free from federal tax; most states exempt earnings from state income tax; and some states let you deduct the full or partial amount of your contribution from your state income taxes.
There are two kinds of 529 programs out there, and their terms and features differ by state:
- Prepaid Tuition – allows you to pay tuition in advance and lock in the cost based on today’s tuition prices. The money must be used toward an eligible public university or private college in the country.
- College Savings Plans – allow you to save money in a special college savings account for tuition and fees, books and supplies, and eligible room and board. They have variable rates of return based on the investments you choose from the available options. These savings can be used at any public or private college or university nationwide.
When it comes to birthdays and other gift-giving holidays, don’t be shy about asking family and friends to help contribute to these savings options in lieu of presents. This works especially well when the child is younger and unaware of the whole gift giving process!
Other Ways to Save
You can go the more traditional route when it comes to saving for college like money market accounts or I Savings Bonds:
Money Market Accounts
With a money market account, your investment will keep up with inflation and you can usually withdraw money within 24 hours. Whatever money market you choose, make sure it’s ensured by the National Credit Union Share Insurance Fund (NCUSIF) if it’s at your credit union. Learn more about money market accounts here.
I Savings Bonds
I Savings Bonds are low risk U.S. government bonds that protect you against inflation. Earning are determined by a fixed rate and an inflation rate that’s based on the Consumer Price Index. This might be a viable option once the inflation rate starts to rise. Keep in mind that you might be able to completely or partially exclude I Savings Bond interest from your Federal income tax. To learn more about I Savings Bonds, visit TreasuryDirect.
The Big Picture
However you decide to save for your child’s college education, just make sure you start early. The earlier you start, the more interest you’ll accrue, giving you a larger amount at the end.
One other thing to remember is: your retirement funds are for your retirement. You can always take out loans for school, but not to retire.