If you already have savings for education, you can put that money to work for you today using a variety of investment vehicles. These include:
Uniform Gift to Minors Accounts (UGMA)
Before we discuss the different investment options available to you, it's important to note that you can grow your savings in an account either under your own name or in your child's name. Such custodial accounts, known as Uniform Gift to Minors, have recently been renamed UTMA accounts.- Income from interest, capital gains, and dividends is taxed at your child's rate, which is typically less than your own rate. The money is taxed at the parent's rate until the child is fourteen years old.
- When your child reaches the age of eighteen or twenty-one (depending on the state), he or she is legally entitled to the funds in the account.
A general guideline
As a general guideline, the further away your educational needs are, the more investment risk you can assume.
- If your need is immediate, you should consider a more conservative strategy.
- Although high-risk investment products tend to give you higher return over the long term, their instability can lead to short-term disappointments.
- More risk usually means you have a higher ratio of stocks to other assets in your portfolio. The balance in a more conservative portfolio should lie with bonds and government securities.
Stocks
As we've mentioned, the more time you have before your child goes off to school, the more attractive stocks, or equities, should be to you as an investor.
- History tells us that over the long-term stocks produce higher returns than bonds do.
- Although in the short-term equities carry a higher risk, if you are looking to invest over a period of ten years or longer, the added risk is negligible.
- You must rely on a financial service provider to purchase stocks. You can purchase them online or off-line, depending on your comfort level.
Mutual funds
Investing your savings in mutual funds allows you to enjoy the benefits of the stock market while reducing your exposure to individual stock risk. Like stocks, mutual funds are appropriate for long-term investing.
- By definition, a mutual fund is a group of securities owned by a group of investors.
- Mutual funds are managed by top-quality money managers who are responsible for making the day-to-day trading decisions.
- Mutual funds often accept small amounts of money - as little as
$100 each month in some cases.
- Depending on your need, mutual funds offer different fee schedules and costs.
- You can buy a mutual fund online or off-line through a financial service provider or directly from the fund manager.
Fixed-income securities
For shorter-term and consequently lower-risk investing, fixed-income securities, or bonds, are a safe and effective alternative for your child's college fund. By definition, a bond is a security that pays a fixed amount of interest at regular intervals over a certain period of time. There are three types we'll discuss here:
- Zero-coupon bonds
- Baccalaureate bonds
- Savings bonds
Zero-coupon bonds
Zeros are a common form of dedicated bonds that are sold at a deep discount.
- Purchasing a dedicated bond allows you to purchase a security that will mature at the exact point in time that you need it to.
- Zero-coupon bonds return both your principal and the interest you've earned in one lump sum at the end of your investment.
- You can purchase a zero-coupon bond through an online or off-line financial service provider.
Baccalaureate bonds
Some states (check with your financial service provider as to which ones) have issued special zero-coupon bonds designed to help resident families pay for in-state tuition. These are known as baccalaureate bonds and are generally an extremely popular option when available.
- Baccalaureate bonds usually cost between $1000 and $5000.
- Baccalaureate bonds mature between five and twenty years.
- Interest on baccalaureate bonds is exempt from federal and state taxes, regardless of income.
Savings bonds
Lastly, saving bonds, or Series EE bonds, can provide a safe place for growing a portion of your education savings.
- The rate is adjusted every six months in May and November.
- They are sold in denominations of seventy-five dollars to $10,000 and are sold by banks and other financial institutions.
- There are no sales charges or commissions.
- The bonds can be redeemed after six months.
- To learn more, go to www.publicdebt.treas.gov, or call 1-800-487-2663.
Education IRA (Based on AGI)
Education IRAs are available for women who have an adjusted gross income(AGI) beneath a set limit.
- The income limits phase out between $150,000 and $160,000 for couples and $95,000 to $110,000 for singles.
- You can use the accounts to pay for college expenses of any family member. If you don't use the funds for educational purposes, you will owe income tax on the amount withdrawn and be hit with a ten percent penalty. The beneficiary of the funds must be under age eighteen when it is initially set up.
- The contribution is not tax-deductible, but earnings grow tax-free and are taxed at the child's rate when withdrawn. The accounts can also be rolled over to another family member if not used by age thirty.
- You can open an account at most brokerages, mutual funds, or banks.
HerTip: WFNInvest offers each of the products we have discussed in this section and many more additional ones as well. Please call 1-877-WFN-4YOU (936-4968) for information on how to get started.
Education trusts
With an education trust, you put money into trust for the purpose of providing for your child's (or other person's) education. The funds can only be used for educational purposes. You will need to conatct an attorney to establish such a trust.
Continue to: Part IV - College and commercial loans
Budgeting