Money tips for new parents, your baby's college fund[SIZE=-1]Your Baby's College Fund "They grow up so quickly." How many times have you heard that phrase from some wistful parent, recalling when his or her own kids were little? Unfortunately, that also means you'll be facing college bills before you know it. Financial writers are fond of quoting big, scary numbers to impress upon readers just how expensive college is likely to be at some future date--so here goes:$379,182!That's an estimate of the cost of four years of tuition, fees, and room and board at a private college for a baby born today. And that's a fairly conservative number, based on relatively modest price increases of 6 percent a yar. In other words, it could be worse. But few people ever have to pay that big scary number--at least right away. According to the College Board, in the 2005-2006 school year, some $135 billion of the nation's collective college bill was covered by a combination of grants and loans.Still, you'd be smart to start saving what you can for college. As with any other kind of investing, the earlier you get going, the more your money is likely to grow.Today's college investors have far more investment options than their own parents did. These are your key choices:529 college savings plans. Though named for a section of the federal tax code, these plans are administered by the states. You can invest up to the limit set by your state (often about $250,000 to $300,000), and the earnings on your money grow federally tax-deferred. You can then withdraw money, tax-free, to pay for qualified college costs. That provision had been scheduled to expire in 2010 but was recently made permanent. "Qualified costs" in this case typically means tuition and fees, books and other supplies, and room and board if the student attends at least half-time.You don't have to invest in your own state's plan, although that's where you should look first, since it may also entitle you to a deduction on your state income taxes. You can compare your state's plan with competing ones and find a wealth of information at www.collegesavings.org, a Web site sponsored by a consortium of states, at www.savingforcollege.com, and at www.nasd.com, which has posted an investor alert of caveats.As you compare plans, be sure to check out: Fees and expenses. These vary dramatically and can take a sizable bite out of your college savings. At this writing, annual management expenses range from nothing to more than 1.5 percent of the money you have invested. Also check out enrollment and maintenance fees and sales loads, which are other ways the companies that administer these plans may chomp away at your money. You can sign up for a 529 plan through a bank or a broker, but the most economical way is to invest directly and avoid commissions. That way you may also avoid being steered into an inappropriate out-of-state-plan simply because the broker stands to earn a higher commission. Investment options. In most states you'll have a choice of investments, though often only one company that provides them. These may range from conservative accounts with a guaranteed rate of return to more aggressive ones (typically investing in stocks), that offer no guarantees but may reward you more generously in the long run. The sooner you need to get your money out, the more conservatively you should usually invest it. With a new baby, you can probably afford to take some chances, but when your child reaches high-school age you may want to shift at least gradually into one of the less risky options. You can also spread your money among several types of accounts. But the IRS allows you to switch investments only once every calendar year. Incidentally, if your child decides not to go to college, you can get the money back, although you will have to pay taxes and a penalty (currently 10 percent) on the account's earnings.Prepaid tuition plans. Another variety of 529 plan, these arrangements let you buy credits to cover tuition at a particular college or group of colleges. Though less flexible than 529 savings plans, they offer the advantage of allowing you to lock in tomorrow's tuition at today's prices. However, unless you have a pretty good idea of where your brand-new baby will be going to college about 18 years from now, you may do better with a savings plan. More information about these plans is available at the Web sites listed earlier.Coverdell education savings accounts. These are the latest spin on Education IRAs. As long as your income falls below certain limits (currently $110,000 in modified adjusted gross income for individuals, $220,000 for couples), you can invest up to $2,000 in after-tax income a year for each child under age 18. While you don't get any tax break for your contributions, the money in your account grows tax-deferred, much like a regular IRA. Money you withdraw to pay qualified educational expenses, including elementary and secondary school as well as college, is free from federal and, in a few states, state tax. You can open a Coverdell account at many mutual fund companies as well as banks and brokerage firms.Custodial accounts. You (or any generous grandparents you happen to have handy) can also sock money away for your new baby in a custodial account. Often referred to as UGMAs (for Uniform Gifts to Minors Act) or UTMAs (for Uniform Transfers to Minors Act), these accounts allow you to invest up to $12,000 per year in your child's name, free of any gift taxes. As of this writing, the first $850 of income on the account each year is tax-free and the next $850 is taxed at your child's rate, which is likely to be lower than yours. Anything beyond $1,700 is taxed at your rate. Once your child reaches age 18, all income is taxed at his or her rate.While these accounts can have their uses, they also come with a number of drawbacks. One is that they could have a negative effect on your child's eligibility for financial aid. Most financial aid formulas treat assets belonging to a child (as UGMAs and UTMAs are considered to be) less favorably than those of a parent (as is the case, for example, with 529 plans).A potentially bigger problem is who controls the money. The trustee (presumably you) has control until your child reaches age 18 or 21, depending on the state. After that, however, it's the kid's cash to do with as he or she pleases. It may be hard to picture your little bundle of joy ever doing anything crazy or irresponsible with your hard-earned money, but it's been known to happen in even the finest of families.If you have substantial assets to invest on your child's behalf and want to retain greater control over the money, a lawyer can acquaint you with other types of trusts.U.S. savings bonds. Never the most glamorous of investments, but a reliable little performer in both good times and bad, U.S. savings bonds have been eligible since 1990 for special tax treatment if you cash them in to pay for higher education. Series EE bonds issued in 1990 or later, as well as Series I bonds, qualify for the break. You don't have to indicate your intention to use the bonds for college when you buy them, so you can always change your mind. But they need to be registered in your name and/or your spouse's rather than your child's, and you must be at least 24 years old when you buy. Interest earned on the bonds is tax-free as long as your modified adjusted gross income is under certain limits. For example, in 2007 a married couple filing jointly is eligible for a full exclusion if their income is below $98,400. Between that figure and $128,400 they can claim a partial exclusion. For more details, visit www.treasurydirect.gov.Investing in other ways. You can, of course, simply invest on your own to cover your child's college costs. You'll miss out on some of the tax breaks mentioned above, although those breaks are no longer quite as attractive, given the reduction in the capital gains tax. You'll also have more flexibility in what you ultimately do with that money. This can be especially important if you're juggling other financial demands, such as saving for your retirement, at the same time.Bear in mind that financial-aid formulas generally treat parents' assets more kindly than money they view as belonging to a child. That is, they expect the student to contribute a far greater percentage of his or her assets to pay the bill. If you expect financial aid to be a major consideration for you when the day finally comes, you may do well to have more money in your name and less in your child's.[/SIZE] [SIZE=-1]Subscribe now![/SIZE]
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