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Moving from child care costs to saving for college

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

Is your child one of the millions of children in child care? If so, the cost is likely a significant line item in your budget. Reliable child care can be difficult to afford. According to recent research, the cost to send a child to daycare averages $340 per week.

Saving for college

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 may 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. We have a college savings calculator that can be utilized to help determine how much to save for your child’s college education. Keep in mind, the average cost for both tuition and books can vary greatly depending on the school selected.

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. Even if you don't contribute this maximum amount allowed by your state, 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 child care 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. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

AP2022/08/0904