2033 is just around the corner. That’s 18 short years if you’re a mom and dad with a newborn. That means you can start now to prep your kids – and your pocketbook – for college. Yes, it’s not too early. The years will fly by.
For those who didn’t start early – and the kids are approaching those college years – begin now to examine your alternatives and approaches. Costs are out of control. Example: What cost less than $900 in 1980 for tuition and fees can now cost you anywhere from $9,000 to $35,000 or more, per year. One semester at The University of Texas or Texas A&M is approximately $10,955. That’s $87,640 for four years, or the equivalent cost of a 2016 Porsche Boxster Spyder 2-door convertible.
Here’s how to get started.
Don’t Wait. The greatest challenge to savings plans of any kind is procrastination. Avoid delays and do it. An initial first step is to first meet with a CERTIFIED FINANCIAL PLANNER® who can guide you through your overall financial goals, including college.
Make Some Assumptions & Decide. This means you think about the type of education your child will receive. Are you a Texas A&M Aggie alum with a legacy that requires your kids to go to there? Do you want your child to attend a state or private university, in state or out of state? Answering these questions provides your baseline for covering costs, at current levels. Note that The College Board reports an average annual increase of 2.5 percent to 3 percent for college.
Discover The 529. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. Contributions to 529s grow tax-free and distributions used to pay for college expenses (tuition, room and board, books and other required supplies) are distributed tax-free. Some key components:
- They offer an advantage for those with significant income since the plans have high contribution limits and potential state tax deductions. The key is to not give beyond a certain limit that triggers the gift tax.
- In terms of a gift tax, parents, grandparents or even friends may make contributions of up to $14,000 ($28,000 for married couples) per child each year, or up to $70,000 ($140,000 for married couples) without incurring a federal gift tax. Source
- Be aware of the impact on a student’s needs-based financial aid application when a parent is the owner of 529 assets. However, if the grandparents are the 529 plan owners it won’t hurt qualification for needs-based aid.
- In terms of estate tax, contributions are not considered part of a giver’s estate. A portion of the contributions is included in the donor’s estate if the giver dies during the five-year election period. Source
- If you have multiple children, a 529 offers the flexibility to use the money among the kids, without penalties.
- Children and other beneficiaries of the plan can be named, i.e., parents, stepparents and stepchildren.
There are additional benefits and conditions related to 529s as well.
Grow, Share & Show. Grow your college savings by encouraging parents, stepparents, grandparents, aunts and uncles to give to the college fund vs. the typical gifts for birthdays and other holidays. Have your child contribute to the fund as well.
Be Realistic. Paying bills, living life, rearing kids and saving money can be difficult and stressful. Regardless of what one “should” be spending and saving, maintain your focus and discipline for long-term gains. This usually requires us to inventory our lifestyles, choices and purchases – and decide on the must-haves vs. nice-to-haves. Be realistic as you spend and save.
These six guidelines get you off to a good start as you prepare for the day when your child pulls out of the driveway for his or her freshman year of college. It’ll be here before you know it. Guaranteed.
Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement, and should be read carefully before investing.
Tax-free withdrawals may be made for qualified education expenses. Otherwise, the deferred earnings portion may be subject to taxes and a 10% penalty. Please consult a qualified tax professional to discuss tax matters. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss.