The Cost of Raising a Child

The average cost of raising a child born in 2011 (including attendance at a public university) is estimated to be $310,262 (Source: USDA 2009 Annual Report and Babycenter.com), so it is never too soon to start saving for your child's education.  There are provisions in the Tax Code to help you get there:

One of which is to setup custodial accounts for children under the Uniform Gift to Minor's Act which allows you to make gifts up to $13,000 per donor per child per year.  The first $950 of investment income earned on these accounts is exempt from taxation with the next $950 subject to taxation at the child's rate, which is currently 10%.  Investment income over the $1,900 is taxed at the parent's incremental rate which can be as high as 35%.  However, by carefully selecting investments that do not throw-off much income, such as stock index funds a good deal of money can be shifted to a child's account with the potential for significant tax savings.  These funds are not restricted and can be used to pay any of the child's expenses.  However, once the child reaches the age of majority, technically (note I said in a technical sense) they have control over the funds.

Another provision is the adoption of an Education Savings Account.  Annual non-deductible contributions can be made up to $2,000 per child.  The advantage to these accounts is that to the extent the funds are used to pay for the beneficiary child's education, the income earned in the account is never taxed.  There are some contributor income limitations to making the contributions, but these accounts remain a good option for education savings.

Another option is to open a 529 College Savings Plan.  These plans must be adopted by states or educational institutions and the investment returns of these state sponsored plans vary greatly.  Internet searches can easily be performed on these plans to determine which state plan best suits your needs.  Again, there is no current deduction for amounts contributed and the contribution is limited to the present value of the cost of the college education.  Contributions can be made on a systematic ongoing basis or in a lump sum.  Lump sum contributions are subject to annual gift limitations although one large gift may be used ratably over a five-year period to avoid gift tax consequences.

Determining what option is best for you can be a bit confusing and I suggest you consult with your CPA as to which plan may best suit your contribution limitations and tax needs.