How to Start a College Fund

How to Start a College Fund
Young boy putting money into a piggy bank.

Getting Started

Your child must have a Social Security number before you can open an account for her. While you can apply for a Social Security card while mother and baby are still in the hospital, you can open a college account before the baby is born by opening the account in your own name and transfering it to your child's name once she's arrived in the world. You can also open an online GradSave account, which allows friends and family to donate education monies in lieu of or in addition to baby gifts.

529 Plans

Formally known as "qualified tuition plans," 529 plans are named for their section authorization under the Internal Revenue code. Earnings in these accounts aren't taxed, as long as the funds are used for educational expenses. Many states offer these plans, and you don't have to be a resident of a particular state to open an account. The amount you can invest annually varies by plan, but some plans allow contributions exceeding $200,000. 529 plans are usually invested in mutual funds. Fees vary according to the plan. You can open 529 accounts directly from the plan sponsor or through your stockbroker.

U.S. Savings Bonds

Plain vanilla U.S. savings bonds have been a staple of college saving for generations. While you won't earn significant returns -- as is possible in some stock and mutual fund investments -- you won't lose money, either. If you use bonds issued in your name to pay your child's education-related expenses, the earnings are tax-free. Only series EE bonds issued since 1989 or series I bonds qualify for the tax exemption.

Coverdell Education Savings Accounts

Opening a Coverdell education savings account allows you to save tax-free for your child's education. Although you can open more than one Coverdell account per child, you're limited to contributing a total of $2,000 annually for all such accounts. That's as long as you meet the adjusted gross income limits. At publication, that's less than $110,000 for an individual and under $220,000 for couples filing jointly. When the money is withdrawn for educational use, you don't pay tax unless the withdrawals are greater than your child's educational expenses for that year.

Mutual Funds

You can open a mutual fund account designated for your child's education either in your own name or in your child's name in a Uniform Gift to Minors account with you as the trustee. You'll pay taxes on mutual fund earnings in your name at your tax rate. If the account is registered as a UGMA, the first $1,000 in earnings is not taxed and the second $1,000 in earnings is taxed at the child's 10 percent rate. However, earnings over $2,000 are taxed at your rate, unless the child's tax rate is higher.