Basic Financial Planning for Newlyweds




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Tax Advantaged Ways to Save for a Child's Education


Your Initial Financial Plan:


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If you're planning to start a family, you've probably already tried to get a sense of how much it will cost you to send your kids to college.  When putting together a strategy for saving for a child's education, following these three steps will help you reach your goal:

  1. Start saving for your child's college education as soon as possible, even if you can only afford to put away a small amount of money each month.

  2. Set aside a certain amount of money on a monthly basis.  Otherwise, it's unlikely you'll have enough money saved when it's time to pay your child's college education.

  3. Segregate the money earmarked for college from your other savings accounts.  After the child is born, consider contributing to either an Education Savings Account or a 529 Plan, since these accounts grow tax-free.

Education Savings Accounts

Under the current rules, you can contribute up to $2,000 per child per year into an Education Savings Account (ESA). Amounts contributed grow tax-free, as long as any money withdrawn from the ESA is used to pay for qualified post-secondary education expenses, or for private elementary school and high school tuition as well. 

Income Limitation:  Unfortunately, single taxpayers whose adjusted gross income (AGI) exceeds $110,000 and married couples whose AGI exceeds $220,000 aren't eligible to contribute to an ESA.  Plus, allowable contributions are limited for single taxpayers whose AGI exceeds $95,000 and for married couples whose AGI exceeds $190,000.

Planning Opportunity:  Amounts contributed into an ESA don't need to be made by the child's parents.  If your income exceeds the threshold indicated above, ask somebody else, such as a grandparent, sibling, aunt or uncle, or friend, to contribute $2,000 into an ESA on behalf of each of your children.

The New and Improved 529 Plan 

Recently, 529 Plans got better.  Below is a summary of the current rules for 529 Plans:

  1. Individuals can contribute up to $55,000 per child into a 529 Plan in a single year. If you contribute $55,000 in one year, however, you need to wait at least five years before making additional contributions to the plan.  And if you contribute more than $11,000 in any one year, you need to file a gift tax return (Form 709) with the IRS.  (Married couples can contribute up to $110,000 per child into a 529 Plan in a single year.)

  2. The money invested grows tax-free, as long as any distributions from the 529 account are used for qualified higher education expenses. 

  3. Each state designated one financial institution to administer their plan.  That means that you can open 529 accounts with any of the large financial institutions.  You can contribute to any state's program, regardless of where you live or where you child ends up attending college.

  4. Some states allow for a tax deduction if you contribute money into the 529 Plan they sponsor.  For example, if you pay taxes to New York State, up to $10,000 per year ($5,000 if you're single) contributed into New York's College Savings Program is tax deductible on your New York return.

What's the downside to 529 Plans?  First off, the money you saved in the 529 Plan might reduce the financial aid you'll be eligible to receive.  Plus, you have no control over how the money in your child's 529 plan is invested.  Before investing in any state's program, make sure to determine whether the financial institution will invest your child's college money as you see fit. 

Have You Signed Up for the Upromise Yet?

When you join Upromise, you'll save for a child's education (even if your child isn't born yet) just by doing what you normally do everyday.  Through the program, companies contribute a portion of what you spend into a Upromise account for your child, grandchild, or any other future college student.  Believe it or not, you'll earn college savings when you buy toys, office supplies and gas, dine out, shop on-line - and even buy or sell a house or get a new mortgage.  To find out more about this great program, check out



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