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Next use for your child care money: College investing

When the kids no longer need child care services, dedicate that money to college funding.

Child care worker with little kids

Is your child one of more than 11 million U.S. children under the age of five in child care? If so, the cost is likely a significant line item in your budget.

Reliable child care can be difficult to afford. Full-time center care for an infant ranges from $4,000 to $18,000 annually; for a 4-year-old, it's $3,900 to $11,000, according to the National Association of Child Care Resource and Referral Agencies.

Saving is not an impossible task

Saving for college may seem impossible while paying for child care along with other fixed expenses, such as housing, utilities, and food. However, there is light at the end of the tunnel. When your child begins elementary school and no longer requires full-time child care, you'll see a significant increase in your discretionary income each month.

But before you convert those child care dollars into disposable income, consider investing in your child's college education. After all, you're already accustomed to living without that income.

Investment options

A number of investment opportunities are available that offer tax advantages while you accumulate funds to help pay for future education expenses. One is the Coverdell Education Savings Account (ESA), a trust or custodial account with a $2,000 annual contribution limit that can be used for your child's elementary and secondary education, as well as post-secondary education, such as college, graduate school, or vocational school. You can invest in a Coverdell ESA account regularly, if your income is under a certain amount, with current year contributions accepted until that year's tax-filing deadline.

If you'd like to invest more toward your child's education, consider a 529 savings plan for qualified higher education expenses. An individual can contribute as much as $75,000 to a 529 plan and treat the contribution as made ratably over a five-year period. For federal gift tax purposes, a $75,000 contribution is treated as having contributed $15,000 (the amount of the federal gift tax annual exclusion) per year for five years. Also, a husband and wife could each make a $75,000 contribution. Even if you don't contribute this maximum amount, it's a good idea to save smaller amounts every month or every paycheck.

A quality education may be one of the most important factors in determining your child's future. It's never too early to begin saving, and dedicating funds you previously used for childcare may be a great way to start.


Neither State Farm® nor its agents provide tax or legal advice.

Before investing in a 529 plan, consider the plans investment objectives, risks, charges, and expenses. Contact the plan issuer for an official statement containing this and other information. Read it carefully.

Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.

If the account owner dies before the end of the five-year period, a prorated portion of the contribution will be included in his or her taxable estate. If you contribute less than the $75,000 maximum, additional contribution can be made without incurring federal gift taxes, up to a prorated level of $15,000 per year. Federal gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a beneficiary in the year of the contribution.

Investments Are Not FDIC Insured* | No Bank, State or Federal Guarantee | May Lose Value

*Except the Bank Savings Investment Option

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. State Farm makes no guarantees of results from use of this information.



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