Invest Childcare Money In Your Child's Future

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

Reliable childcare can be difficult to afford. Full-time center care for an infant ranges from $4,650 to $18,200 annually; for a 4-year-old, $3,900 to $14,050, 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 childcare along with other fixed expenses, such as housing, utilities and food. You can take solace in the fact that there is light at the end of the tunnel. When your child begins elementary school and no longer requires full-time childcare, you'll see a significant increase in your discretionary income each month.

But before you convert those childcare 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 college savings plan for qualified higher education expenses. An individual can contribute as much as $65,000 to a 529 plan and treat the contribution as made ratably over a 5-year period. For federal gift tax purposes, a $65,000 contribution is treated as having contributed $13,000 (the amount of the federal gift tax annual exclusion) per year for 5 years. Also, a husband and wife could each make a $65,000 contribution.

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.

Investing involves risk, including potential for loss.

Diversification and asset allocation do not assure a profit or protect against loss. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations. Bonds are subject to interest rate risk and may decline in value due to an increase in interest rates. The S&P 500® Index tracks the common stock performance of 500 large U.S. companies.

AP2012/02/0224