Education savings

If you’re planning to help pay for your kids to go to college, the earlier you start saving, the better your chances of having the money you need. Remember compounding? It means that the more time you give your money to grow, the more you can do with less. For example, if you have a newborn and begin saving or investing $250 each month, at 7% annual return, you’ll have over $100,000 in 18 years. To make the most of your time and take full advantage of the power of compound earnings, you can use special accounts to save for college, including state-sponsored 529 college savings plans and Coverdell education savings accounts (ESAs). You can also use money in an ESA to pay for schooling for your kids from kindergarten through high school. We’ll look in more detail later on at various college savings plans.

You don’t owe any tax on earnings in either 529s or ESAs while you’re saving, and the withdrawals are completely tax free if you use the money to pay qualified education expenses.

You can set up an ESA with a bank, mutual fund company, or other financial services firm. And you can invest in a 529 through your financial adviser, or in some cases, directly with the company managing a state plan in which you are interested.