from ages 15- 18, Smith guides his clients to 25% in aggressive growth funds, 50% in growth and income funds and 25% in bonds.
Are you a late starter? Then we suggest you alter one of the timetables according to your preference, bearing in mind you’ll probably need to be a bit more aggressive to catch up. Try increasing the stock or equity mix in your portfolio a bit to help your investment grow faster.
By now, you may have heard about the advantages of saving college funds in your child’s name. Beware. While there may be significant tax advantages for establishing savings and investment accounts in your child’s name, there are problems with this strategy, as well.
Up until age 14, the first $650 you place into a custodial account is tax-free, says Marc Britton, director of personal financial planning at KPMG Peat Marwick LLP in New York. The next $650 is taxed at the “kiddie tax” rate of 15%. Above $1,300, the account is taxed at the parents’ tax rate, which could climb to 39.6%. When the child reaches 14, however, the taxable rate for the custodial account drops back to the child’s income tax rate.
The problems begin once children reach age 18, when they are given legal access to the money and can do whatever they please with it. That’s not to mention how a custodial account could hurt your chances of landing financial aid. Colleges expect students to use a greater percentage of their assets for college expenses than their parents, says Chany. For example, if a college fund of $40,000 is in the parents’ name, the parents would be required to use a maximum of $2,260 for the student’s first year, or 5.65% of those assets. If the same college fund is in a child’s name, the student would be required to pay $14,000, or 35% of the child’s assets. According to Chany, salting it away in your child’s name makes sense only if you believe they’ll be ineligible for financial aid, then at least you can take advantage of the tax savings.
Another possible investment vehicle to use for a child’s education is your 401 (k) plan, which takes money out of your salary before taxes are deducted. Smith of The Ohio Co., recommends that parents place the maximum amount in their 401 (k)–preferably 10% – 15%. The income earned in the retirement plan will grow tax-free until it is withdrawn at retirement age. For example, if you earn $50,000, and you place 15% of your salary into the 401 (k) with your company matching 3%, you will contribute about $7,500 and your company another $1,500 to the account, totaling $9,000 a year, Smith says.
If the retirement account earns 10% each year, you will accumulate roughly $310,000 in 15 years. “When your child is ready for school, you can borrow back $100,000. But begin taking some money out for college, like $20,000 a year, and pay it back over five years,” Smith suggests. Your monthly payments