Should you start saving for your teen's college tuition?

With college tuitions increasing far faster than the rate of inflation, you can never start saving too soon for your teen's college fund. In fact, many people are now beginning to save for college well before the teenage years, some even before the baby is born. Regardless of your child's age, the important step is to start saving.

You have a number of options to help you save specifically for college. One popular option is to take advantage of a 529 plan, so-named after the IRS code section that created it. A 529 plan allows you to save for educational expenses tax-free. Each state runs its own 529 plan and you aren't compelled to use the plan in your home state. You can compare all the various 529 plans and find the one that works best for you. A 529 plan can also be a great option because it's transferable. This means that you can open a 529 and start saving even before your child is born and then transfer the account to your child later on.


You can also save money tax-free in a Coverdell Education Savings Account (ESA). The contribution limits for an ESA are considerably lower than on a 529 plan; so you might want to front load your contributions into a 529 plan before saving in an ESA. However, on the upside, you can use money from an ESA account for elementary- and secondary-school tuition, not just college.

What both these saving plans have in common is that they encourage early and consistent savings. The benefit is not just that these plans provide a tax-free way to earn and spend money on education, but in the beauty of compound interest. No matter how little you put away each month, compound interest over time will let those little amounts grow into large amounts. So start saving now!