Monday, October 22, 2012 at 10:09pm by Site Administrator
This is Part II of a larger educational resource, Money Management: A Guide to Teaching Finances to Children.
A college savings program that is undertaken with your children’s involvement can serve to both fund their education and teach them about investments. Several government-sponsored investment vehicles can accomplish this, including 529 Plans, Coverdell Educational Savings Accounts (ESAs) and U.S. Savings Bonds.
Popular among parents, a 529 Plan offers a long-term strategy towards saving money for college. These plans work in two ways; families may either pre-purchase class credits and room and board at any state institution, or they may invest funds in a holding account that is designated for future college expenses. Each plan has its pros and cons, but both offer parents an opportunity to involve a child in important decision-making about the future.
In a pre-paid tuition plan, money is deposited regularly into an account that is maintained by the state. This provides an opportunity to teach children about budgeting and saving towards a future goal. This type of 529 Plan is advantageous because the per-credit cost is locked in and inflation does not factor into these future costs; this can open an opportunity for discussion about economics. Pre-paid tuition plans are not without limitations, however. This state-backed option requires that students use the funds at an in-state school, and carries a 10% withdrawal penalty for expenses unrelated to college.
Another 529 option is to invest savings in a fund that is managed by a broker and invested on the student’s behalf, much the same as with a mutual fund. Since account-holders do have some say in how the money is invested, parents may take this chance to teach their children about the exchange market and returns on investments. While associated broker’s fees make this option more expensive, students are allowed to use the funds at any school.
Coverdell ESAs and Savings Bonds
A unique opportunity to teach older children about the taxes appears when investing in Coverdell ESAs or U.S. savings bonds. A governmental incentive to save money, ESAs allow for tax-free savings of up to $2,000 per year. Funds accrued in these accounts can be used for expenses related to any public or private education from elementary school through college. Younger children who benefit from a Coverdell ESA can be shown the immediate result of wise investing. The Education Savings Bond program similarly can be used to demonstrate the value of saving; bonds that are gifted to a child accrue value tax-free and may be redeemed for tuition expenses without penalty.
Continue to Part III: Actionable Ways to Teach Children Finances, or return to the Table of Contents.