Tips to Save Money for My Children – Part II

What are the important aspects of “kiddie taxes”?

Before explaining the concept of kiddie taxes, allow me to explain the situation that led to the issuance of these types of special taxes. There was a time when parents used to opt for investment plans (primarily in the form of stocks) by the name of   their child. Their children could in turn attain profit from the same because of the reduced taxes. However, according to the newly introduced “kiddie tax”, they will have to pay taxes equivalent to their parents. Nevertheless, this policy is only valid until the child reaches 19. Once the age limit is crossed, the tax amount is altered in order to tally with the child’s rate (which, by the way, is lower than the former).

The system was introduced when congress realized how investment options were being misused by a small section of the society.

What are the important features of Education IRA? Am I eligible for the program?

Firstly, it is improper to mention the program as the education IRA as it was replaced some time earlier with Coverdell ESA. The program is straightforward and is primarily intended for those parents who seek to give higher education to their children. It is often considered as an investment option – but it comes with the additional advantage that no form of taxes will be imparted when the program lapses ultimately the parents are bestowed with the entire sum. An age limit of 18 is presently set for this program and once the child reaches the age, the parents will have to stop making the payments.

The payments that are made on the behalf of the Coverdell program must be in cash. No other form of payment is accepted into the program. Many technicalities are associated with the paradigm, and it is hence better to contact an investment expert to understand the underlying concepts. High interest rates are provided over a period of 10 years. In order to illustrate the affectivity of the program, allow me to cite a suitable example. If you start the program by investing just $500, in 10 year’s time the amount might camouflage itself to $5000! Do you realize the potentiality of the program?

Help Me. I was foolish enough not to save any considerable amounts for my child’s college education. What am I supposed to do now?

Well, like they say better late than never! Here are some strategies that can be exercised so that you will be able to make the ends meet by the time your child is about to enter college!

  • Start saving now. Reduce the overall expenditure levels of the house. Start monitoring the bills and lower the consumption levels of household accessories. Never indulge in activities that will part you away from your hard-earned money.
  • Start making extra money. It is better to opt for a second job. I do realize that life is tough, and you will have to work hard to make the ends meet. If viable, allow the child to earn and start a savings bank account for him.
  • As a last resort, you can try for loans or grants, although the chances of obtaining one are slim these days. Maintain a good credit history and you might be given the green signal and ultimately the loan might be sanctioned.

About Praveen Pious Francis
A part-time blogger who has a wide range of interests including investing in the stock markets across the globe and broadband technologies in India.

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