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.
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.