This was originally published on Monday,February16 , 2015, in the Pacific Daily News. Click here to subscribe to the PDN.
Question: My wife and I just had our first baby and we would like to start a college fund for her. We have done some research but not sure which plan is best. Could you help clarify our options?
Answer: Congratulations on your new baby girl! Becoming a parent is such joy and comes with some major responsibilities. Giving your daughter a chance to further her education in the future is one of the greatest gifts you can give her. Starting off early is a wise decision; if you start early it won’t feel so taxing to your pocket versus trying to play catch up later down the line.
• 529 Plan: This plan is named after Section 529 of the Internal Revenue Code. According to the Internal Revenue Service’s website, the 529 Plan is “a plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.” On Guam, the 529 Plan is called the Guam College Savings Program.
With a 529 Plan, contributions to the account are tax-deferred. If a withdrawal is made for education purposes, it is tax-free. It is designed to pay for tuition and fees, books, supplies and equipment.
• Stock/bond fund: This option works well when started early. The key is to keep your investment simple. If you use a financial planner, you will not have to be so hands on. Have the savings amount withdrawn from your bank account monthly. Planners will usually base your allocation on your child’s age. When they are younger, you have the opportunity to make more with a riskier investment. As the child gets closer to high school graduation, your planner may decide to move into lower risk.
• Coverdell Education Savings Account: Withdrawals are tax-free, but there is a cap on how much you can contribute. The annual contribution limit per child is $2,000. The contributions must be made in cash and cannot be made after the child reaches the age of 18.
• Financial institution: Check with your bank or financial institution if they have college savings accounts. Research their interest rates and know what fees and penalties are associated with the account. Question if it is a time certificate, a simple savings account, or do they invest your contributions.
You can contribute to both a 529 and a Coverdell Education Savings Account to the same child in the same year without penalty. However, your contributions may be subjected to gift-tax limitations. If you have not started to save, it is never too late. If your child goes to a four-year college, you do not have to pay all the tuition all at once. With the continued rising cost of college tuition, it is smart to save today and let your money grow.
Remember that there are many programs out there that can help you pay for your child’s education and very few that help you out in retirement. Be sure to invest in your retirement fund as well. In the future, Social Security may fall short and you will still need a supplemental income once you retire. If you fall short with tuition do not use your retirement fund.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.