College Saving Savvy

As you watch your toddler read her first book, upside down, thoughts of her freshman year in college may seem hazy. But the sooner you start socking away funds, the better your chances of getting her there. It will cost about $440,000 to send a baby born today to a four-year private college. The tab for a state school is about half that amount.

Though the horizon is distant, when it comes to saving for higher education, time is of the essence: The sooner you get cracking, the lower your monthly payments. For example, a high school senior’s parents who started saving when their child was born eighteen years ago would’ve had to save about $245 a month to cover current college costs, according to research from mutual funds provider Fidelity Investments. If they waited until the child was ten years old, that figure more than triples to $915 a month. “Parents really need to begin saving early and regularly,” says Carolyn Clancy, executive vice president at Fidelity’s Personal and Workplace
Investing Group. Where to start? Plain vanilla savings accounts generally aren’t the answer, because they pay low interest rates and withdrawals are taxed. Here, instead, are better bets.

529 Plans
What are they? Probably the most popular college savings vehicles, these state-sponsored programs allow money to grow tax-free. Plus, withdrawals are exempt from federal taxes (and state taxes in some states) as long as the money goes to qualified educational expenses such as tuition, books and room and board. A stash of $300 a month can turn into $115,000 in seventeen years.

Pros
Minimum monthly investments are low ($25), and maximum yearly contributions are high ($12,000 for individuals or $24,000 for married couples). If you get a late start, you can make a special lump-sum contribution of up to $60,000 ($120,000 for married couples) to a child’s account without gift or estate tax implications.

“The 529 plans provide the most benefits in terms of tax advantages and parental control over the assets,” says René Kim, senior vice president at financial services company Charles Schwab, who oversees the company’s retirement and education products.