One of the most challenging parts of planning for a college education isn’t getting accepted – it’s figuring out how to pay for it. Long before your child is applying for schools, their college savings plan should be in place and growing.
When do you start? What’s the right investment strategy? How should it change over time? These are just a few of the biggest questions you may have.
Five Things You Need to Know:
Start Early – A Long Time Horizon Builds Value
The earlier you start, the longer you have to sock away savings and grow the balance. If you are using a savings account, a longer time frame provides access to higher-yielding options. With a horizon of more than five years before you’ll need to access the funds, an investment account is also a good option. You’ll have the opportunity to invest in an allocation that will give you the potential for growth, such as a moderately aggressive portfolio of 60% stocks and 40% bonds.
Remember, the average total cost of college can range from $20,000-50,000 per year1, so you’ll need to save more aggressively than you think.
Don’t Just Save – 529 Plans Provide Tax and Investment Advantages
529 plans are tax-advantaged savings plans specifically designed to help parents pay for their child’s education (although, they can be used by more than just parents). 529 plans are not just for college – tax-free withdrawals may also include up to $10,000 per year in tuition expenses for K-12 schools. State tax treatment of K-12 withdrawals varies. Although contributions are not deductible at the federal level, earnings grow federal tax-free and there is no federal tax on withdrawals to pay for college. Depending on your state, you may be able to deduct contributions from your state taxes.
All 529 plans have a plan manager, usually a financial services firm, that manages the portfolio of investments. You’ll be able to create a portfolio from an offering of mutual funds and ETFs, and tailor it to your time horizon and investment preferences. Both you and your spouse (and anyone else that wants to – it’s not limited to parents) can contribute up to $15,000 per year each (in 2019) and still fall under the gift tax exemption.
You can fund the account with a total of five years’ worth of your annual exclusion gifts, so your child’s 529 can begin with a balance of $75,000.
The key to saving is to do it consistently. Figure out your budget, plan the amount you can invest, and have it automatically deducted from each paycheck.
Get Your Child Involved: Custodial Accounts Create Commitment
Getting your child involved in the process by setting up a savings or investment account that they can contribute to is a great way to keep them focused on college and teach them some basic financial skills. The Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act (UGMA/UTMA) allow you to create a custodial account in a minor child’s name. This can be done at a bank or with a brokerage firm. The accounts can be used to deposit gifts of cash that the child receives – for instance, birthday or holiday checks from grandparents or other family and friends, and also for the child to save his/her own earnings.
Shift the Allocation Through the Journey
Similar to shifting your retirement portfolio allocation to be more conservative as you get closer to retirement, your child’s 529 plan allocation should be monitored and reallocated as they progress through high school and the time horizon gets shorter. Your financial advisor can help you make decisions to preserve what you’ve built up and provide for continuing growth.
Got a Late Start or Have a Generous Benefactor?
If you are over the gift tax exclusion and the 529 plan isn’t enough, paying tuition directly to the college or university is of course always an option. This applies to anyone – not just parents, so if grandparents, step-parents, partners, friends or others want to help out, they can make payments directly, without penalty.
Don’t Limit Your Options
The second most important factor in affording college? Encourage creative thinking, in yourself and your child, instead of a focus on one school or one specialization. College success story: One mom knew her daughter’s deepest desire was to live in NYC. She researched schools, and while New York University was out of the budget – Fashion Institute of Technology was not. Her very not fashion-oriented but analytically-gifted daughter visited the school, realized she could put together an international business degree with a concentration on data – and at graduation got hired by a financial firm to manage internet analytics.
Like any other goal, such as buying a home or investing for retirement, consistent savings and a solid financial plan can get you there. Your financial advisor can help you deploy the tools you need to get you – and your child – where you both want to go.
1 The College Board reports the average cost of four-year colleges for the 2017–2018 school year was $20,770 for public schools (in-state) and $46,950 for nonprofit private schools, only including tuition, fees, and room and board.
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