Planning for College for a Child or Grandchild
It is no secret that paying for college is expensive, and the costs keep rising every year. Many parents and grandparents want to help as much as they can when it comes to easing the burden of higher education expenses for their children and grandchildren, and doing so can help their loved ones enter adulthood in a better financial position. Below, we look at some tips for college funding and some savings plans geared specifically toward education expenses.
Put Time on Your Side
As with saving for your other financial goals, starting early and saving consistently will give your investments more time to grow. For example, if you begin investing $200 per month when your child or grandchild is born, assuming a 7 percent annual return on your investments, you would have more than $81,000 put away by the time the child starts college at age 18. The sooner you begin saving, the longer your money will have time to grow and accrue interest. If you didn’t get an early start on saving, remember it is never too late to get started.
Set Realistic Savings Goals
It is important to set realistic and actionable goals when saving for college expenses. This will help you better stay on track and monitor your progress. Saving for college is a long-term goal, so making it a priority in your budget and being consistent with the contributions will help improve your chance of success. In most cases, you will know when you will want access to the funds needed to pay for college expenses, so understand the timeframe of your savings goal. You will also need to pick the most appropriate account or savings plan that best fits your and the student’s unique needs. Some options include a basic savings account and education specific plans such as a 529 plan, a Coverdell Education Savings Account and UGMA/UTMA accounts.
Understand the Costs
It is no secret that college is expensive. The average cost of college in the United States is more than $35,000 per year per student, and the cost of tuition tends to inflate at more than 6 percent per year. (1) The main categories of college expenses include tuition and fees, room and board, books and supplies, personal expenses and transportation. Private universities tend to be more expensive than public institutions, and out-of-state tuition can be nearly three times as expensive as in-state tuition, so where your child or grandchild decides to attend will be a driving factor in how much the education ultimately costs.
Don’t Sacrifice your Future Retirement
While helping to pay for a child or grandchild’s education is an important goal for many, it is important not to jeopardize your retirement by neglecting those needs to help your children or grandchild pay for college. Saving for your retirement should be the top priority. If you do have the funds available, that is great, but be careful not to risk your own financial wellbeing. Keep in mind there are many ways students can pay for college expenses including federal aid, scholarships, grants, loans and work study. Depending on your family’s financial situation, your child or grandchild may need to fund their education expenses from several different sources.
Understand College Savings Accounts
A 529 plan is a great tool to utilize when saving for college. Investors can save money on behalf of a beneficiary, and the invested money will grow tax free and can be withdrawn tax free as long as the funds are used for qualified education expenses. This includes college expenses and up to $10,000 for primary or secondary school tuition. There are no income or contribution limits for contributions, but contributions greater than $15,000 per year from an individual must be reported to the IRS and will count against the taxpayer’s lifetime estate and gift tax exemption amount. The investment options for 529 plans are limited. A 529 Prepaid Tuition Plan is also an option, but this type of plan is only offered in some states and at some colleges, so you can lose some of the tax-advantaged benefits if you choose an out-of-state plan.
The Coverdell Education Savings Account (ESA) is a tax-deferred trust account that allows for funding of education expenses. In most cases, the beneficiary of the account must be 18 years old or younger when the account is established. Withdrawals from a Coverdell ESA are free from federal taxes if the money is used for qualified education expenses. This can include tuition, books, supplies, uniforms and room and board. The maximum contributions that can be made into a Coverdell ESA is $2,000 per year, and there are income limits for contributions into the account. The funds in the account can be used to fund qualified expenses for kindergarten through college and generally need to be distributed by the time the beneficiary reaches 30 years old. There are more investment options available with Coverdell ESAs compared to 529 plans.
Universal Gifts to Minors Act and Uniform Transfers to Minors Act (UGMA/UTMA) accounts are custodial accounts that are controlled by a parent or other relative until the child reaches adulthood. These accounts do not have the same tax benefits as 529 plans, but they do offer more flexibility in how the funds can be used. One thing to keep in mind when considering UGMA/UTMA accounts is the fact that once the minor reaches adulthood, the custodian must turn over the assets to the account owner.
As with any major financial goal, saving for college can seem like a daunting task at first. A Financial Planner can be a valuable resource in helping you determine how to meet your college funding goals and what type of savings plan or account will best fit your needs.
Authored by Dennis Culver, Insight Wealth Strategies
Insight Wealth Strategies, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Insight Wealth Strategies, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Insight Wealth Strategies, LLC unless a client service agreement is in place.
Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.