HOW TO PAY FOR COLLEGE

SAVINGS PLANS & INVESTMENT STRATEGIES

As a parent, saving for your child's education is likely one of the biggest savings goals you'll ever have, aside from your retirement. With the rising costs of tuition and the rate at which childhood seems to fly by, it can feel like a daunting task. But with careful planning and thoughtful strategies, you can give your child a valuable head start to a healthy financial future.

START EARLY, START NOW

When it comes to funding your child's college education, starting early can make a world of difference. The best scenario is to start saving as soon as your child is born and has their Social Security number. Eighteen years may seem like plenty of time, but it goes by quickly, and the sooner you start saving, the more opportunity you have for growth.

That said, the newborn stage is of course a busy time for parents, and many people begin saving sometime within the first five years, which still leaves plenty of time for funds to grow.

TYPES OF EDUCATION SAVINGS PLANS

There are several types of accounts designated specifically for education funds, and each comes with different pros and cons. Whether you're just beginning to think about saving or already have some plans in place, it’s important to know your options, so you can decide what's best for your family.

529 PLANS

One of the most flexible education savings accounts is the 529 plan, an investment vehicle that offers significant tax advantages. With a 529 plan, parents can contribute up to $18,000 annually per beneficiary of after-tax money, and the growth accrues tax-free. So if you contributed $20,000 and it grew over 13 years to $50,000, your child would have $30,000 of tax-free money (plus the $20,000 you already paid taxes on) to use for qualified education expenses.

The definition of qualified education expenses has grown over time and includes tuition and fees, supplies like textbooks and computers, and even room and board (with a few stipulations). The money can also be used for vocational schools or apprenticeship fees.

If the money is used for an unqualified expense, the growth is taxed and you receive a 10% penalty.

WHAT IF MY CHILD DOESN’T NEED THE MONEY FOR COLLEGE?

There are several ways the funds in a 529 plan can be used, depending on your family’s situation. If the original beneficiary receives a full-ride to his or her school, the amount of the scholarship can be withdrawn without a penalty, but you still must pay taxes on the growth. The fund can also be transferred to a sibling or other family member of the beneficiary. A 529 plan can even be used for a master's program, so there are several options if the funds aren't needed for an undergrad education.

A recent tax bill even allows for an unneeded 529 plan to be transferred to a Roth IRA for the beneficiary. This can be a unique way for parents to help their young adult children since Roth IRAs allow withdrawals for first-time home purchases. So on the chance that your child doesn’t use the funds for school or a trade program and there isn’t a secondary beneficiary, they can start building wealth for their future.

HOW DO I CREATE A 529 PLAN?

When we help clients establish a 529 plan, we create a diversified portfolio based on their financial situation, goals, and the child's education timeline. Much like with your retirement savings, it's important to create a healthy balance of growth and stability, so we'll look at individual funds that allow for more aggressive growth early on and lower-risk vessels like College Date Funds.

In Georgia, single-filing taxpayers can deduct up to $4,000 per beneficiary per year from their state taxes for contributions to a 529 plan, but the plan must be set up through Path2College, a program that does not partner with financial advisors. So while you could receive the bonus of a state tax deduction (albeit a small one) by contributing to a 529 this way, you wouldn’t have an advisor who understands your situation and goals helping you build the account.

OTHER EDUCATION FUNDS

A Coverdell Education Savings Account (ESA) follows the same tax structure as a 529 plan, but has more contribution limits; if an individual’s annual income is greater than $110,000, they cannot contribute to an ESA (or $220,000 for married couples filing jointly), and qualified account holders can only contribute $2,000 per year per beneficiary.

Uniform Transfer to Minors Act accounts (often referred to as UTMAs or UGMAs for Uniform Gift to Minors Act) are established under the minor's name with the parent or guardian acting as custodian of the account. This allows for the first $1,250 of contributions to be tax-exempt, and for the next $1,250 of contributions to be taxed at the child's tax rate (which would be lower than the parents), but further contributions are taxed at the parent's rate.

The benefit of a UTMA is that there are no stipulations as to what the money can be used for—it’s just an account designated for your child, so they could use it to, say, purchase a car. But from a tax perspective, it doesn’t allow for as much long-term growth as a 529 plan, and some parents worry about their child having control over the account once they reach the age of majority, especially since there are no spending stipulations.

CUSTOMIZE YOUR EDUCATION SAVINGS PLAN

The most important thing to remember when planning for your child’s education is to find a plan that works for you. For some families, spending flexibility is more important than a tax break, so they opt to save in a joint investment account rather than a 529 plan or ESA. For many, the best solution is to diversify, combining a 529 plan with other savings strategies so they have options down the road.

If you’re ready to create a personalized savings strategy for your child’s education, we would love to help you. Email or call to schedule a consultation with us.