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Saving For Your Child’s Education

Paying for college can be one of the largest expenses in your financial life.  It can also be one the best investments you will ever make for your family.  Estimates for the cost of college can vary widely depending on the age of your child, whether they would attend a public or private college, and what level of degree they plan on attaining.

The first step in determining how to save for college is to determine how much of the expense burden do you want to cover for your child.  Some parents believe that their child should share in the expenses for their college education as a way to motivate them.  Other parents believe that graduating from college debt free is the best gift they could give to their child.  Some parents cover the cost of an undergraduate degree and expect the student to cover any additional degrees.  One approach is not better than the others but instead is a parental choice that you must make prior to saving for college.

By 2030, the average four year cost of college is estimated to be $135,000 for a public institution and $285,000 for a private school.  In order to fully fund college at these levels, you would need to save about $300 / mo for public and approximately $600 / mo for private for the next 19 years generating a return of around 7% each year.  Depending on your cash flow, you may not be able to afford this monthly outlay but the key is to begin to save whatever amount is currently feasible.

Once you have established the parameters of savings for your child’s education, you have several account options available to you that provide tax benefits.  The most common account used to save for college is the 529 College Savings Plan.  Contributions into 529 plans offer a current year state tax deduction (subject to limits,) earnings grow tax deferred, and withdrawals for college expenses are made tax free.  In order to receive the state tax deduction, you must open a 529 account with your state of residence.  In the event you were to move out of state, you can open a 529 account with your new state and roll your existing funds into the new account, in most cases.

Since 529 plans differ from state to state, their investment options do as well.  Some states have limited investment options only offering aged-based portfolios where the investments are designed to become less risky as the child nears college, while other states have an expanded list of quality mutual funds to choose from.  Consult with your advisor to determine which investment approach is best for you.

Tax free withdrawals can be made from 529 plans to cover an expanded list of eligible expenses.  In addition to tuition and books, eligible expenses include computers, internet access, and even off campus housing.  To the last point, most schools are migrating towards using a fixed dollar amount that may be withdrawn tax free based on the cost of living in their location.

Aside from strictly saving for college, 529 plans can play an important role in managing your long term wealth.  They offer extensive estate planning flexibility and benefits that you should discuss with your advisor.  Strategies to reduce or even eliminate your state tax liability can be achieved with the help of your accountant.  It is important to understand the limits on contributions and deductibility before enrolling in a 529 plan.  While you have the ability to bring any excess 529 funds back into your estate, there are tax penalties associated with doing so.

For additional information on saving for your child’s education, please contact Scenic Wealth Management.