College, technical or professional training are tools you may use to launch your children or grandchildren into a future life of independence. After all, in a knowledge-based economy like ours, what your children know and can contribute can be of substantial value to different employers and therefore generate higher pay for them.
There are three ways to pay for the training - beforehand, during and afterwards.
1. Beforehand means putting money aside from income or assets into an account that will be available to pay tuition, books, room and board, and other expenses when the time comes to pay the bills. This approach has time working for you; the money you have contributed into your account may earn interest and dividends and even grow.
2. During means using your income to pay the bills directly while your (grand)children are in school. This approach can work great, but with current high educational expenses you need to have substantial discretionary income to find enough money.
3. After means taking out loans and paying them off over time. This is the most expensive approach, because you have to pay interest on the money owed.
Of course, you can use any combination of these approaches.
If you want to invest the money beforehand, there are a variety of approaches you can use including trusts, Coverdell plans, Uniform Gifts or Transfers to Minors, and 529 plans. 529 plans can be a particularly effective tax-advantaged approach. Investments in 529 plans grow tax-deferred. If used for full-time expenses at approved schools, the investment gains are never taxed. Be careful though, because if 529 money is not used for this purpose, gains are taxed and penalty fees are assessed.
529 plans have become popular also because of their flexibility and control. Each plan has a single owner and beneficiary. The owner has complete control over when money is to be distributed and to where. The owner can change the beneficiary to a close relative of the beneficiary, even him/herself, if needed.
Each state has its own 529 plan with its own investment manager, but you can use any state's 529 plan for approved schools anywhere in the country. A few states encourage their lower-earning residents to contribute to 529 plans by adding state money.
Contributions to 529 plans are limited now to $12,000 per owner per beneficiary each year, and you can contribute up to 4 years ahead. Thus, in the first year 2 parents can set aside up to 5 years X $12,000 per year X 2 parents or $120,000 per child.
The term 529 refers to the section of the tax code that regulates this area. Tax laws are technical and complicated. Consult your tax or legal professionals regarding your specific needs and objectives.