The ShareBuilder Education Savings Account
by Doug Gerlach
Paying for a child's college education has long been a dream for many parents. But with the costs of a four-year private college reaching $17,123 a year in 2001-2002, according to the College Board, that dream has become a nightmare for many. If costs continue to rise at a rate of 5% a year (as they have in recent years), the cost for a single year of college in 2017 could top $36,000!
With a new Corvette currently selling for just a bit more than half the cost of four years of private college, you might be tempted to buy the kid a car and shove them out the door when they turn 18. But remember that college is one of the best investments you can make for your child's future. (And increasing their earnings power could be good when you're old and gray and depending on your dear children to support you.)
The best way to meet the challenge of helping your kids get through college without turning into a pauper yourself is through long-term planning. Fortunately, Uncle Sam is willing to give you a hand in saving and investing for a college education, with tax breaks and special education accounts that help to maximize the growth of your savings.
The ShareBuilder Education Savings Account (Coverdell ESA) is one of the plans that can help you save for your child's education. As much as $2,000 a year can be contributed to a child's ESA, up until their 18th birthday, and anyone can contribute - parents, grandparents, relatives, or even generous, big-hearted friends (if you're lucky enough to have them). With ShareBuilder, you can set up an automatic, recurring investment plan allowing you to invest $166 each month for 12 months during the contribution period rather than having to invest the full $2,000 all at once. Your money goes directly into shares of the stocks that you choose.
If you invest $2,000 per year and earn a fixed annual return of 6% from the time your child is born, you'll have more than $61,000 when your child turns 18*.
Once the money is in the account, it grows on a tax-deferred basis - a big break from the federal government that can add up to thousands of dollars over the years when compared to saving in a taxable account. While you don't get a deduction on your federal taxes from an ESA, withdrawals are tax-free, as long as the proceeds are used for qualifying education purposes (books, tuition, fees, room and board, and even computers - but not football game tickets or fraternity sweatshirts). Tuition to an elementary or secondary school, uniforms and costs for special needs children are eligible as well.
As with IRAs and 401(k)s, the contribution limit is phased out for those who have modified adjusted gross income between $95,000 and $110,000 for single persons and between $190,000 and $220,000 for joint filers. But if you're a high income parent and can't give, an eligible grandparent could still contribute up to the max in any year. Your eligibility isn't affected by contributions you make to a Roth or Traditional IRA, either.
Once you've set up an ESA, the investments in the account are completely in your control. You'll need to figure out how best to invest the cash in the account. That's where PortfolioBuilder can help you find the right balance for your particular needs. Use PortfolioBuilder and set up an investing plan free.
Whether your child is a newborn or a 7th-grader, the time to start saving is right now. The longer you have to contribute - and the longer your money can be working for you in the ESA - the greater you'll likely have to draw from on the proud day when you send your child off to college.
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