Saving For College: A Decision Full of Opportunities
The school year is officially over! But eventually, the kids will be heading back in the fall and it’s never too early -or too late- to think about opening a 529 plan to start saving for college.
What’s the best way to save and how much?? Oh, it would be like winning the lottery if we knew that exact answer. Will the kids attend a “traditional” 4 year university or a trade school? In-state or out? Public or private? Cover 100% of the cost or let the kids carry part of the burden? Maybe they get a scholarship, maybe they skip it and go pro… Here’s the bottom line: this is crystal ball work if your kids are young. Whether you want to pay in full for their college or not at all and let them figure it out on their own, a decision should be made as part of your mindful spending plan. Let’s take a look at why, how and how much you could consider saving for college, even if you don’t have young kids.
Why You Should Think About Saving For College
It’s no secret that the cost of college education in the US has skyrocketed in the last two decades. Since it doesn’t look like there will be a reversal of that trend anytime soon, it makes financial sense to benefit from the concepts of time value of money and interest capitalization to build an educational nest egg so you are ready when the time comes, particularly if you want to limit or avoid a student debt scenario for your children. The sooner you start, the more time you have to grow that nest egg.
Have you had that conversation with your partner or with a trusted advisor already? And if so, have you taken any steps to put a plan in motion to meet your objectives? If not, what are you still waiting for? You know what they say when it comes to raising kids: the days are long but the years are short. When you least expect it, you will be touring colleges and renting that cap and gown for your kiddo.
If your kids are grown up or you don’t have or plan to have kids, this topic is still of interest to you. Why? Well, even if you don’t have young kids, you can make college savings part of your estate planning strategy or make a difference by sharing this info with anyone in your circle whose family could benefit from it, so feel free to share this blog with them!
Saving For College with a 529 Plan
When saving for college, the most used vehicle is a 529 plan account. With so many choices out there, how to choose the right one for you? If you’re in a state with income tax, use one within your state to maximize the tax advantage. Otherwise, choose freely around the nation as the funds follow the beneficiary wherever they go, provided the expenses meet the requirements. The plan should have good investments to choose from, low costs and not layer fees (be smart and choose one with good quality/cost balance so your money actually grows.) Also, the manager should be easy to work with in terms of communication, distribution simplicity and making timely payments.
What’s all the fuss about 529 accounts? Well, they are the most advantageous and tax efficient savings vehicle for this purpose. Distributions are tax free if used for qualified educational expenses. Also, they count minimally against the student when asking for financial aid if the account owner is a parent, or not at all if it is a grandparent! This grandparent loophole presents a great opportunity if you are looking to take money out of your estate. You’re still subject to current gift giving limits but with a lump sum option to invest significant cash upfront, it’s definitely something you can consider and discuss with your tax accountant and estate planning advisor. Also, 529 plans’ rules have changed: they can now be used for private K-12 education as well, and benefits can be transferred to immediate family members and future generations so don’t worry: someone else in the family can have it if Johnny skips college.
Also, if life goes sideways and you end up needing that nest egg for your own retirement, you can take the money out: it’s your money. True, it won’t be cheap since you’ll have to pay a penalty and lose the tax exemption on the distributions but the money is not lost forever. Talk to your accountant to figure out the most tax effective way to do this, you have options.
Other Saving Alternatives To Consider
Although 529 plan accounts are the most common vehicle used for saving for college, they’re not the only option. What are other alternatives to consider?
You can consider UTMA accounts. These are custodial accounts opened on behalf of a minor and managed by a guardian. They carry a tax advantage to the giver and are great vehicles to teach kids how to save and manage money. The drawback is, by law, as soon as that minor turns 18 (or 21 or 25 depending on the state) they become sole owners of the account. So not only are you -potentially- giving hundreds of thousands of dollars away to a teenager and hoping they use it exclusively for college academics (good luck!) but also that money will count against FAFSA calculations, and the kid has to file yearly tax returns: even if they don’t pay taxes, they still have to tell uncle Sam. You do you but, in the context of saving for college, this alternative looks like a triple whammy to us.
Another alternative is buying real estate, renting the property, growing the cash flow and using that (or the sale of the asset or both) to pay for college. This sounds like a reasonable plan if you are into real estate and being a landlord is your thing. For many people this is a real gamble as there’s no way to predict whether the cash flow and the capital appreciation will indeed be enough to cover for education expenses in 10-15 years. And if your child graduates during a real estate market dip like we saw in 2008, it may be difficult to sell at the necessary time.
This brings us to a third alternative: writing a check. It doesn’t get more straightforward than this folks! Mindfully create a bucket in your spending plan before that kiddo is even born and make it grow until they’re ready to go to college and conquer the world. But wait! What if you didn’t have the money then? What if you’re reading this when the kids are starting middle school? You’re late to the game but still have time to save some money and help them for college or grad school instead. Depending on your particular situation you can still consider a 529 plan or we can show you other super tax effective accounts: talk to us, we’ve got you covered.
How Much Should You Save For College?
It depends on your personal preferences and your financial situation. Trying a college savings calculator is a good start. Run the analysis, rein in the fear and consider your options to start saving (we can help you with this.) Should you expect to cover 100% of the cost? You likely won’t be able to guess it and maybe, nor should you! Even if you have the means to pay for it all, consider covering 70%-80% and make the rest their responsibility. There is something to be said for the kids having a little skin in the game; it’s a great way for them to understand the impact of their decisions and create good money habits for themselves. Also, it’ll get them motivated to get good grades to keep a scholarship and finish school, and to get a job to pay back any loans.
Granting the gift of education is one of THE best gifts of all. If you can afford it and it is important to you, by all means go ahead and do it! But if that’s not the case, you shouldn’t fully fund the kids’ education at the detriment of your own retirement: consider this our suggestion to “put your mask on first, then assist the person next to you”. If circumstances change and contrary to your initial desire you find yourself needing that money to support your own retirement, don’t hesitate! Take care of yourself first.The kids have a much longer time horizon to save and pay for college themselves, and that’s okay too.
Navigating this and many other financial planning decisions is not always easy. Lucky for you, this is our area of expertise and we are happy to help you in your financial journey. Let’s talk!