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2. College...is it worth the price? Steps to take when saving for college 6. Educational IRA and Investing Strategies |
Education IRA
The education IRA is an investment that allows people to help save for college while providing some tax advantages. When saving for college, every dollar counts and it helps to have some of the money tax-free.
An education IRA allows an individual to invest up to $500 per child per year. This money will grow tax-free and can be deducted if it is used for the child's education. Like most IRA's, the money cannot be withdrawn for other reasons without having to pay income taxes as well as a 10% penalty.
An education IRA can be established for a child by anyone who has an income below $95,000 per year for a single person or $150,000 for a married couple who is filing income taxes jointly. This means that a parent, uncle, aunt, grandparent, or anyone else that fits this requirement may open an education IRA for a child.
The money in an education IRA must be used for education purposes by the time the child reaches the age of 30. If the child decides not to attend college or does not attend college by the age of 30, the money can be rolled over to another family member. So, if Charles does not decide to attend college, then he can give this money to his younger sister Sally for her college education. If Sally already had an education IRA, the money from Charles' account can be combined with hers.
An education IRA provides a great tax advantage but it isn't generally an investment that you invest in with very little time until college because the maximum amount that an individual can contribute into the plan each year is $500. Although this amount may be raised to $2000, an education IRA is still an investment that is best for people who begin saving for college early.
Investment Strategies
There are a few different strategies that you can use when preparing for college. These are different ways of allocating your assets. Here are some recommended examples of how you can allocate your investments. However, this does not mean that you must follow these examples. You have to decide how much risk you are willing to take when investing with money that is intended for college.
Asset Allocations
From newborn until age 5
-With plenty of time to save, you can accept a little more risk with the ability to increase your gains
Stocks- 100%
From age 5 until age 10
-With less time until college, diversifying into bonds will help reduce risk
Stocks- 75%
Bonds- 25%
From age 10 until age 15
-College is becoming closer as each year passes. Diversifying into bonds a little more will help reduce risk
Stocks- 65%
Bonds- 35%
From age 15 until age 18
-College is just a few years away so you don't want to take as much risk
Stocks- 40%
Bonds- 60%
College years
-Now that you or your child is in college, it is a good idea to keep some money in liquid investments like savings accounts or money-market funds in case an unexpected expense arises.
Stocks- 10%
Bonds- 25%
Liquid Investments- 65%
Now that you have an idea of how to save for college, you are ready to begin. If you have already began, we hope that you continue your good investing habits and we wish you the best of luck with your college education.
