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Should you start saving college before your baby is born?

In addition to buying a home, paying for college has become the biggest investment for many families.

One of the best ways to save college is a 529 savings plan that allows you to grow your tax-free money. If the funds are used for qualifying education expenditure, the income will not be taxed on federal and, in most cases, on state level.

Recently, I invited an expert for 529 to answer reader questions during my weekly online discussion. Mark Kantrowitz, the editor and vice president of the research division ofavingforcollege.com, had this to say to those who are trying to save for the future of their children.

Q: My spouse and I are planning to have our first child soon and are looking for ways to reduce our tax debt this year. Would it now be a good option to start a 529 in one of our names?

Kantrowitz: Even before the birth of my children, I started saving for my children's college education. If you start saving for college before the child is born, you will have more time to be interested and increase your savings. If you save before going to college, you will have the option of receiving contributions to the baby's college savings plan during a baby shower.

Assuming an average annual return on capital of 5 percent and a monthly contribution of $ 250, the family over 17 years will earn $ 80,465 (36.6 percent of income), $ 87,664 (38.4 percent of income) over 18 years, $ 95,232 (40.1 percent of income) over 19 years and $ 103,187 (41.9 percent of income) over 20 years.

You can start saving for a child's higher education before the child is born by identifying yourself as the beneficiary of the 529 plan. After the child is born and has a social security number, you can change the beneficiary into the child.

I have two boys – a 7 year old and a 2 year old. Saving for college was not a priority as we spent all of our extra money in the cost of day care. We want to save aggressively when day care ends. Would you save the same amount for both children, or would you pre-charge the older boy's account?

Kantrowitz: It's best to start saving for college as soon as possible and set up an automatic investment program that will channel the money into your 529 plan. In this way, you get used to the idea of ​​saving for college. Later, when diaper and daycare costs run out, you can redirect the money you've previously spent toward their 529 plans.

You can measure the annual progress of saving for your children's education by multiplying their ages by $ 3,000 each, assuming they are enrolled at a state-run state college.

You may want to make a lump-sum contribution to each child's 529 plan that equals the shortfall. If you do not have enough for both children, you need to decide how to divide up your savings. In general, you should save more for the older child because you have less time to catch up.

We are interested in sending our children to the Catholic school. Can we use the accounts to reduce tuition while saving for college?

Kantrowitz: The 2017 Tax Cuts and Jobs Act added K-12 tuition, up to $ 10,000 per beneficiary per year, as a qualified cost for 529 plans. So you can use money in a 529 plan to help pay for private elementary and secondary schools, including private religious schools. However, check with your state as some states do not consider K-12 training a qualified expense at the state level. This can lead to state income taxes if you use a 529 plan for K-12 tuition.

Also, keep in mind that the money in a 529 plan does not have that much time to add value when used for tuition. It's best to use a 529 plan to save for college, not K-12.

Students who complete a private high school are more likely to enroll in a private college. They also tend to win scholarships. Some parents mistakenly believe that their child receives more college scholarships when they pay for private K-12. However, the average increase in scholarships is only about $ 1,000, which can not even cover the cost of higher education.


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