Although you can't put a price on the joys of having children, there is definitely a price tag that comes with raising them. According to the U.S. Department of Agriculture, a baby born in 2000 will cost between $117,000 and almost a quarter of a million dollars to raise to age 17.
While those numbers seem staggering, what's even more alarming is that the figures don't include college. So even if you're pretty sure you can cover diapers, video games and years of Spaghettios, you may not be sure how you're going to swing the cost of Harvard. Fortunately, there are many ways to pay for college. Scholarships, grants and student loans are good standbys, if available, but you may want to consider some updated options.
Education IRAs
Available since 1998, this type of account allows contributions of up to $500 a year per child for post-secondary education. Contributions can be made until the child is 18, and an account can be established by almost anyone. That means grandpa and grandma, or Aunt Pearl can help out, as long as their income falls within the eligibility brackets.
Although the contributions are not deductible, the money withdrawn after age 18 (including dividends and interest income) is tax-free if used for qualified higher educational expenses. Remember though, if Junior decides to skip college in favor of touring the world to “find himself,” withdrawals not used for educational expenses may be subject to both income tax and a 10 percent IRS penalty tax.
College Savings Plans
These savings plans, also called Qualified Savings Tuition Plans, are available in two options: pre-paid tuition plans and state-sponsored savings plans (also called 529 Plans). Pre-paid tuition plans let you lock in today's rate for tuition, so the amount you set aside today will buy the same amount of tuition at a school in your state in the future. But if you're hoping to send your child to a private school, this plan may not be for you. Many plans may be used only at in-state public schools. Another potential pitfall: If you prepay at the University of North Dakota and your daughter has her heart set on the University of Hawaii, she may be out of luck.
State-sponsored savings plans, on the other hand, will allow students to attend a school out of state (although there may be penalties). These plans let parents contribute up to $100,000 per child for higher education. There are no parental income limits, and the state — not the participant — controls how the money is invested. Contributions aren't deductible, but the money invested grows tax-deferred. Best of all, when the money is withdrawn, it will be taxed according to your child's lower tax bracket. Currently, 34 states offer these plans.
Tapping Your Own IRA
Although this shouldn't be your first choice, it is an option. Traditional IRA withdrawals for qualified education expenses for you, your spouse and your children are allowed without the 10 percent IRS penalty. You can withdraw money tax-free from a Roth IRA account for any purpose as long as you've held the account at least five years and are at least 59 1/2 years old. Withdrawing from your retirement savings, however, should be your last resort. Your kids can always get part-time jobs to help pay for college, but you don't want to be flipping burgers at age 80.
(Courtesy of ARA Content, www.aracontent.com, e-mail: info@aracontent.com)
