Your child's education is perhaps the most important contribution any parent can make to its future. But the cost of education is high and rising quickly. College inflation is currently about six percent each year.
The earlier you prepare for your child's future, the more money you will have saved when your child needs it. In many countries, universities are largely financed by the government and students are able to secure government grants for their education.
In the United States there are a number of State funded colleges and scholarships for students. There are also a couple of ways the government can help you start saving for college. Talk to your financial advisor to see what is most suitable for you.
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If you plan to make contributions of no more than $500 per year you should consider starting an Educational Individual Retirement Account. The money in the account is tax deferred until your child goes to college. As you make contributions they will grow and you can invest them in a growth mutual fund. You can continue to contribute to the mutual fund. When your child goes to college, the money can be taken out tax free to cover their college expenses.
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Perhaps you want to contribute more to your child's education than the $500 limit imposed on the Educational IRA. If so, you might want to create a Uniform Gift to Minors Account, or UGMA. The money in this account is tax preferred and not tax deferred like the Educational IRA. If you choose to set up Uniform Gift to Minors Account you will use your child's social security number.
Technically the money will belong to your child, while you as custodian, have a legal fiduciary duty to handle the money in a prudent manner. Until your child reaches the age of 14, the first $650 of income in the account is tax-free. The following $650 is taxed at the minor's rate of 15% and the remainder is taxed at your rate. After your child reaches the age of 14, all of the income in the account over $650 is taxed at 15%.
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