It is easier to save if you have a realistic goal - and that goal does not have to be the full amount of your anticipated college costs. Our recommendation is that a student opens a savings account specifically for college and be dedicated to putting at least something into it on a regular (weekly, monthly, etc) basis. This is a great place to put half of your birthday money, babysitting money or tips you receive - and it is not a bad place for parents to contribute to as well. This account needs to be one you cannot 'touch' until college.
Here are a few other ways to begin saving for education:
Indiana's CollegeChoice 529 Investment Plan
Indiana's CollegeChoice 529 Investment Plan is a great investment vehicle for everyone to consider. It has attractive tax benefits with flexible investment options to help pay for qualified college-related expenses.
For Indiana residents, these are the benefits:
- CollegeChoice accounts grow free of taxes. When used for college-related expenses like tuition and fees at colleges nationwide, the money withdrawn is also exempt from federal and state taxes.
- CollegeChoice accounts are rewarded with 20% credits (up to $1,000) on state taxes. For example, a typical $5,000 deposit earns a $1,000 Indiana state tax credit, which represents an immediate 20% return on the investment.
- Anyone can contribute or open an account to take advantage of the tax credit, even to help pay for an immediate college-related expense like this year's tuition bill.
Because of the importance of planning for life after high school, every Hoosier family should consider the benefits of opening a CollegeChoice account.
Education Savings Accounts and IRAs
Investing money in a Coverdell Education Savings Account (formerly an Education IRA) allows parents to accumulate tax-free interest and withdraw money from the account without penalty. According to federal tax law, regular IRAs and Roth IRAs can also provide penalty-free money if funds are withdrawn for educational purposes.
Tuition Account Plans
Prepaid tuition plans, also known as tuition account programs, are college savings plans that are guaranteed to increase in value at the same rate as tuition. The main benefits of these plans are that they allow parents to lock in tuition at current rates. Moreover, any family member can invest. In addition, prepaid tuition plans are often exempt from local and state taxes, but the child must pay federal tax on the plan at the time it is used.
For more information regarding this option, visit the IRS Web site to read more about the Taxpayer Relief Act of 2001 section 529.