Starting a Savings Account for Children

A friend recently told me that her son's college tuition is expected to exceed $60,000 for the 4-year public school he is targeting in 10-15 years. She's starting early by opening a savings account for her son. She's looking for high market returns and will likely be investing in stocks since she has over 10 years before the money will be needed.

If you are looking for an easy way to save for your child's college education or other expenses, there are lots of choices available. There are advantages and disadvantages to all the plans available and it is important to talk to a tax advisor if that is one of the important considerations to you. Consider the following types of accounts when you are researching college savings programs for your children:

• Custodial Savings Accounts. One easy way to start a savings account for your child is with a custodial savings account. A custodial savings account is in your child's name, but you are able to control how it used until your child reaches legal adulthood (18 to 21, depending on your state). You can deposit as much as you want into the savings account and other family members such as grandparents can also. You can make withdrawals at any time (for your child's benefit) without paying penalties.
• 529 Plans. There are two categories of 529 plans, college savings plans and pre-paid tuition plans. Both categories are sponsored by states, state agencies or educational institutions. Pre-paid tuition plans lock in future tuition rates while college savings plans are based on market returns. Most 529 plans can be used to attend college in any state no matter which state plan you choose.
• Coverdell Education Savings Account. The Coverdell Education Savings Account isn't for everyone, but many families will find them appealing since they allow you to save money not only for college, but also for elementary and secondary school expenses. Tax law does prohibit ESA funding once the beneficiary reaches age 18. While the Coverdell can be used in addition to a 529 plan, it is limited to $2,000 per year in contributions.

No matter which plan you choose, consistency is key. Automate your savings and contribute an equal amount every month. Don't try to time the market, pick solid investments that will grow over the long term. With a plan and consistent savings you'll meet your college savings goals with time to spare.