Some options to consider
Hey everyone, I always try to write about financial topics that feel relevant, and that I answer questions about on a regular basis. One such topic, one that currently hits close to home for me, is college planning. My youngest child is beginning to look at colleges so it’s a top-of-mind subject.
Any of you with high school children understand when I say it is a very stressful decision for many kids. As students take their entrance exams and fill out applications, you probably have many thoughts going through your head, one of which is probably “How am I going to pay for this?” Even if you don’t have kids thinking about college yet, you should pay attention to the different ways you can save for college. The earlier you begin to save, the more you will have when the time comes. Thus, in this article, I’m going to share a few different college planning ideas with you.
The first, and most known way to finance your child’s college education is a 529 Plan. Simply put, a 529 Plan is a tax advantaged investment account designed to help parents and/or grandparents save for a beneficiary’s future “qualified higher education expenses.” What that includes is tuition, required fees and room and board. Each state has at least one type of 529 plan available, and few have residency requirements so access to these plans is very easy. There have been some exciting changes to the 529 Plan platform in the last year that have made it more flexible. You can now use up to $10,000 per year from a 529 account to pay for tuition for elementary or secondary school in addition to college.
Investors utilizing a 529 Plan have a wide range of investment options, depending on their time horizon and risk level. You can choose from various mutual funds, ETFs, and principal protected bank products. In addition, many 529 Plans will have Target Date funds available which follow a glide path based on when the beneficiary will be starting college. As the beneficiary moves closer to that start date, the account will automatically become more and more conservative. Things to consider when deciding how to invest include your time horizon, risk tolerance and other investments you may have outside the 529 Plan.
Additionally, there are some tax benefits to starting a 529 plan for your child or grandchild. Those benefits vary from state to state and depend upon the 529 Plan of your choosing. States may include deductions on your taxes for contributions to a 529 Plan. If you use withdrawals from a 529 account for the qualified higher education expenses outlined above, those withdrawals will not be subject to federal income taxes, and often state income taxes as well. Another huge tax advantage is the tax-free earnings associated with a 529 Plan over the period you are saving. Make sure to educate yourself on the tax implications of the 529 Plan you choose to invest in since the benefits vary on a state by state basis. It is important to note there are some restrictions surrounding 529 Plans. If you do not use your 529 account to pay for qualified education expenses, you essentially forfeit the tax advantages of the account, and will be subject to federal and state income taxes and a 10 percent penalty on earnings.
While 529 Plans may be the most popular alternative of saving for college in America, it is not the only vehicle you can use. There are many strategies that you can employ, such as a traditional savings accounts and money market accounts. You can also use a cash value life insurance policy as a more flexible way to grow assets to pay for education.
College planning can be a stressful topic for many families and I encourage you to start that conversation before your child begins high school. As I noted earlier, the sooner you begin saving the more time your money has to grow. As always, we work for you so never hesitate to reach out to your financial advisor if you have questions regarding college planning or any other financial matters.
Article Written By David Wentz
David Wentz is CEO of Tax Favored Benefits, Overland Park, Kansas. Wentz is a graduate of the University of Kansas School of Law with a Juris Doctor degree. Wentz frequently speaks at various professional and business seminars about pensions, profit sharing, 401(k) plans, tax favored benefits, and investment programs. Western Equipment Dealers Association endorses Tax Favored Benefits as a 401(k) provider. No compensation is received. More information is available at www.taxfavoredbenefits.com.