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Financial Matters for Parents
How to Start Planning for Your Child's Future
By Jean H. Manrique
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"Even if you can only afford to put in $25 a month when your baby is born, at 10 percent interest you'd have $13,000 when Junior turns 17 years old," says Thomas Nohr, certified financial planner from Castro Valley, Calif. For parents who don't have a lot of money when their baby is young, Nohr recommends starting a Roth Individual Retirement Account. Up to $2,000 can be contributed yearly, or $4,000 for a married couple. A Roth IRA then allows a $10,000 withdrawal, without taxation, to be taken out for each dependent for the purpose of education.
After building the Roth account to $500, Nohr suggests that parents then expand into an education IRA account, which allows a contribution of $500 per year per social security number listed on the account. "When Uncle Bob gives Junior $25 for her birthday, an education IRA account gives you a place to put the money without being taxed," Knoll says. "The money can only be used for education, and there is no tax whatsoever" when the money is withdrawn for that purpose. Another plus is that "if more than one child is on the education IRA account, and one child decides not to attend college, the amount can be used for other children named in the account." An additional advantage is that the savings in an education IRA should not detract from a student's eligibility for financial aid.