Saving for your children’s education can seem like a daunting task. While there are many factors to consider, in today’s blog post you will learn about 3 tips to help you better understand the education savings landscape.
TO SAVE OR NOT TO SAVE
TIP #1: Determine whether or not you should be saving for your children’s education in the first place.
There is no doubt that many parents strongly desire to fund their children’s education. Outside of retirement, it is the parents most popular goal. We get the opportunity to talk with many families and it never fails that the majority wish to plan for their own retirement and fund some portion, if not all, of their children’s college education.
But the problem with that for many families is that there simply isn’t enough money to do both. When a family is forced to choose between their own retirement and their kids education, it puts them in an uncomfortable position. However, it doesn’t have to be that daunting.
One piece of advice that you may have heard before is that your children will likely always be able to get a loan for school but you won’t be able to get a loan for your retirement. Said a different way, “YOU HAVE TO PRE-FUND RETIREMENT, NOT COLLEGE”.
This statement alone seems to put things in perspective for parents. It allows them to see that it’s okay to “be selfish” and fund your retirement, because after all, no one else is going to do it for you. But college on the other hand can be funded by someone or something else (i.e. loans, endowments, scholarships, children getting a job, etc.).
So, if you find that you are unsure of whether or not you can fund both your own retirement and your children’s college, then it will be important to have a conversation with an independent financial planning firm to discuss your options.
SAVING FOR CHILDREN’S EDUCATION
TIP #2: Use a 529 Plan
If you decide that you are able and willing to pay for your child(ren)’s education, then the most preferred method is a College Savings 529 plan. Every state has its own 529 plan. But as you can imagine, some are better than others. And depending upon which state you live in will determine whether or not you get a state tax deduction when you make contributions. It will require some digging on your part to determine which 529 plan you are most comfortable with, but for many of our clients we prefer the State of Utah 529 plan.
And as a side note, we don’t charge our clients for setting up and managing their 529 plan. It is our way of giving back to clients.
Some people are hesitant to use a 529 as they are fearful that their children won’t go to college. And while this is a risk, there are a couple of outs that you have. For example, you can change the beneficiary to another family member (including yourself). Also, many vocational / technical schools are covered.
But ultimately if your child doesn’t go to college at all and you close out the 529 account, you would have to pay income tax and a 10% penalty on the earnings only. Your contributions would not be taxed or penalized.
But, with that said, why is a 529 Plan the preferred way to save for college?
First, the money in the 529 plan grows tax deferred. And if you’ve followed my blog, you know that tax deferral is a powerful way to grow your money. Second, if the funds are used for qualified education expenses, then they are completely tax free. And finally, if you choose the right 529 plan, you could save quite a bit in state taxes. In my home state of Missouri, if a family contributes $16,000 per year to their 529 plan, then they will likely reduce their state taxes by around $1,000 per year.
Be sure to check your state’s 529 rules and talk with your accountant to find out what sort of deduction you may be entitled to.
TIP #3: Decide whether or not you will fund Private K-12, College, or Both.
With the recent tax reform that passed there was a major change that was made to 529 plans. Now, 529 plans can be used for private K-12 expenses. Previously only 529’s could be used for college expenses.
With the tax reform you can now use up to $10,000 per year per child for K-12 expenses. In the state of Missouri, this is huge as many families choose to send their children to private K-12 school.
If you have the means, then you could essentially fund a good majority, if not all, of your children’s education with tax free dollars.
I hope you have found this post useful and it has given you some things to be aware of.
I would love to hear your thoughts on whether or not you feel a parent should save towards their children’s college. Should college funding take priority over retirement savings? What other thoughts do you have.
If you have any questions about your personal situation, feel free to contact us.
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