Borrowing with smarts (part 5)

Education

In-state plans

In addition, some states permit tax advantages for their state residents who use an in state plan. Meaning, the contribution to the plan might be tax deductible even – or the income earned is exempt from the state taxes – or the state may even match part of your contributions.

If you are certain that your child wants to go to an in-state school for their higher education, you will find that this is the saving plan to go with. Again, you must be certain that your child has an in-state school in mind. An in-state plan provides the best tax advantages or other great features while you are saving and it is also the best deal when it comes to paying in-state tuition. Now, if your child decides to go out of state, you can still use the contributions, but at a different rate of interest and some rules apply.

If you are uncertain of your child’s desire as far as in-state and out of state goes, you should use one of the higher rated plans from your own or another state that permits you to use the money at any college. Most times, these savings plans invest your money ina pool based on the child’s age, with the investments shifted from more aggressive to more conservative ones as your child nears the college years. Other plans permit you to have more control over the way the money is invested.

Building your education account

Even though you can many times open these Section 529 plan accounts with only&250-$1,000, you can add tens of thousands of dollars a year, if you were able to. This makes these plans very flexible. You may want to begin with a small monthly contribution while you may have other obligations in the beginning, them start adding more substantial amount of money into the plan as your other debts are paid off.

Obviously, the sooner you start adding more money the better. But even if your child is in high school and you are still adding small amount to the fund, you will still be better off than if you were not adding anything at all. Even your child can add to the fund from summer jobs and other family members can also help out by adding money.

IRAs for education

Education IRAs are more flexible than they used to be, even though the contribution rate is lower. These types of savings accounts are valuable to parents of younger children since you withdraw money to pay for expenses while they are in elementary and secondary school, as well as for college.

With this type of plan, your contributions are limited to $2,000 per child each year. You can even put in less money if you have to. But if you have set up this account, you would be able to add money given to children by their grandparents and other relatives.

This type of IRA’s money can be used fro college and it can also be used to pay education related expenses once the child starts grade school or high school. This could be tuition for a private school; it can even be fro school supplies including a computer or other educational tools. This money can even be used to pay a tutor. Withdrawals on these accounts are free from taxing. So, you do not need to pay tax on the accumulated earnings at the time of withdrawal. This makes these types of saving plans the best as long as you start them when the child is young.

Worth noting: There is an income limitation to make contributions to education IRA account. Couples with adjusted gross incomes of more than $190,000 are no longer able to make full contributions to these accounts. If the adjusted gross income is above $210,000, they are unable to contribute at all after this happens. Too many tax shelter issues are involved it seems.

Be sure to read on to our next section about borrowing with smarts as it will cover vacation savings plans.

Part 6...

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