Sponsored by: Chuck Smith Jr., AAMS®, Financial Advisor
Summer is almost over, which means it’s “back-to-school” time. If you have young children, you may be purchasing backpacks, pencils, notebooks and similar items.
But one day, you could be shopping for colleges — and when you do, you’ll find the bill is a little bit higher than the one you get from your local school-supply store. That’s why it’s never too soon to start saving.
Just how costly is college? For the 2014–2015 school year, the average expense — tuition, fees, room and board — was $18,943 at a public four-year school and $42,419 at a four-year private school, according to the College Board. And if recent history is any guide, these numbers will likely keep climbing.
But there’s no need to panic. For one thing, your child may be eligible for loans, grants or scholarships. Still, you will likely end up shouldering some of the financial load, and you may ask yourself if it’s worth it. How much difference can a college degree make in the lives of your children?
Actually, college still seems to be a pretty good investment: The average college graduate will receive about $1 million more in lifetime earnings than the average high school graduate, according to the U.S. Census Bureau. So when you assist your children in getting to college, you can be reasonably sure that you’re at least helping them start on the path toward a rewarding career.
How should you put away money for college? Unfortunately, more parents use a general savings account than any other method, according to Sallie Mae’s How America Saves for College 2015 study. These accounts pay little or no interest and offer no tax benefits.
As an alternative, consider investing in a 529 plan. Contribution limits are quite high, and federal taxes won’t be assessed on earnings used for qualified higher education expenses. (The earnings portion of withdrawals will be taxed, though, and can incur a 10% penalty if the withdrawals aren’t used for qualified expenses.) Furthermore, your 529 plan contributions may be deductible from your state taxes. But 529 plans vary, so be sure to check with your tax advisor regarding deductibility.
Another college funding option is a Coverdell Education Savings Account, which, like a 529 plan, can generate tax-free earnings if the money is used for higher education expenses. You can typically only put in a maximum of $2,000 per year to a Coverdell account, but it offers more flexibility in investment choices than a 529 plan.
You could also consider a custodial account, known as either UGMA or UTMA. You can put up to $14,000 per year into a custodial account without incurring gift taxes, and earnings would only be subject to the “kiddie tax” — that is, the first $1,050 is tax-exempt, the next $1,050 will be taxed at the child’s tax rate, and just the amount over $2,100 will be taxed at your tax rate. However, once your children reach the age of majority (either 18 or 21), they take control of the money and can do whatever they want with it — and their plans may not include college.
Don’t wait too long to begin funding whichever savings vehicle, or vehicles, you choose. Your children may be young today, but before you know it, they’ll be college bound.