While there’s no obligation to pay for your child’s or grandchild’s college education. Helping them fund some or all of it can allow them to avoid overwhelming amounts of student loan debt. It can also help them to begin adulthood on the right foot.
Here are some tips if you’re interested in incorporating college planning into your financial plan:
1. Start early.
Ideally, you’d start saving for your child’s college when they’re born. Before you start a college fund for a baby, sit down and figure out how much money you’ll need to save. Historical data shows that the cost of a college education usually triples over the 17 to 18-year period from birth to college enrollment. Therefore, you’ll want to do some research and find out the average cost of an in-state college and out-of-state college the year your baby is born. Then, take these numbers and multiply them by 3. The figures you come up with will give you a rough estimate of how much college may cost when your child is ready to attend. Remember, you don’t have to cover the entire cost of their education. Even paying for a quarter of it can do wonders for their future.
2. Open a 529 college savings account.
529 plans are state-sponsored, tax-advantaged savings accounts designed to help families save for educational expenses. There are two types of 529 plans: prepaid tuition plans, which allow you to buy credit for future tuition at today’s prices, and education savings plans which involve investing money to grow over time. The 529 contributions are invested and grow tax-free until they are needed to cover the beneficiary’s educational expenses.
3. Utilize UGMAs and UTMAs.
The UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) are custodial accounts created to hold and protect money for minors until they turn the legal age in their state. While they allow stock, bond, and mutual fund investments, they don’t permit higher-risk investments like stocks. Since there are no limits, you can invest as much money as you’d like with these accounts, and be allocated toward anything, not just college expenses. Remember that if you go this route, however, your earnings will be taxed once they exceed $2,100.
4. Open brokerage accounts specifically for college funding.
If you opt for a brokerage account, you’ll get to invest in anything, including stocks, mutual funds, bonds, currency, or futures, and be able to deposit and withdraw money at any time without penalty. However, the most notable disadvantage to brokerage accounts is that they don’t come with any tax advantages. You’ll be on the hook for paying taxes on any returns you earn. You may also have to make a minimum investment and pay management fees.
5. Use life insurance.
If you’re a parent or grandparent, life insurance can be used for funding part or all allowable education expenses without tax consequences, assuming interest applies to the cash value. If the child doesn’t use it for education funding, you give them the gift of life insurance for themselves or their beneficiaries.
6. Invest in Your Child’s Talents.
Whether your child plays sports, dances, or participates in the band or orchestra, investing in these extra-curricular activities can open the doors to financial aid while enriching their life. There are many scholarships, grants, and other opportunities for children with unique talents.
Consult Your Financial Professional
A financial professional can help you save for your child’s college through the strategies that make sense for your unique situation. Contact us today to get started.
SWG2306340-0722c The sources used to prepare this material are believed to be true, accurate and reliable, but are not guaranteed. This information is provided as general information and is not intended to be specific financial or tax guidance. When you access a link you are leaving our website and assume total responsibility for your use of the website you are linking to. We make no representation as to the completeness or accuracy of information provided at this website. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, websites, information and programs made available through this website.
In addition, Peak American specializes in providing strategies and guidance for those who are seeking a better lifestyle in retirement. If you have retirement savings of five million dollars or $50,000, we can ensure it works as hard. As a result, we offer our experience and knowledge to help you design a custom strategy for financial independence. Contact us today to schedule an introductory meeting!