The financial planning tools for parents can still forge a child’s college dreams.
By Craig Bolger
Like all parents, you have hopes and dreams for your sons and daughters. But many of these aspirations depend on the ability of your children to earn a college degree. To help prepare your kids, you can encourage them to develop good academic habits— but when it’s time for them to head off to school, will you be prepared financially?
As you probably already know, college is expensive. Consider this: For the 2016-17 school year, the average cost (tuition, fees, room and board) was about $20,000 for in-state students at public universities and more than $45,000 for private schools, according to the College Board. And these costs are likely to climb.
So, when your children are quite young, you may already want to save and invest for the high costs of higher education. But in the current environment, what’s the best way to put money away for college?
There’s no one “right” answer for everyone, but you do have several options. Here are a few of them:
• Roth IRA—If you have a Roth IRA, you can withdraw your contributions, tax-free, to pay for qualified higher-educ-ation expenses. (You can’t take tax-free withdrawals from the earnings on the contributions until you’re 59 nd have had your account at least five years.) Your Roth IRA can be a handy source of college funding, but any money you take out for your children’s education is money you won’t have available for the real goal of the IRA—your retirement.
• Custodial account—You could establish a custodial acco-
unt, known as an UGMA or UTMA, which offers some tax benefits and no contribution limits. But minors gain control of the account at the age of majority, and they can do whatever they want with the money—and their desires may not include college.
• 529 plan—As a college savings vehicle, a 529 plan offers several advantages. For one, contribution limits are quite high—you can accumulate more than $200,000 per beneficiary in many state plans. And you can typically invest in the 529 plan offered by any state, even if you don’t reside there. If you do invest in your own state’s plan, you may be able to deduct some or all of your 529 plan contributions from your taxable income.
As always, the best prospects for attaining your savings goals come with starting early and contributing often to that college fund.
Also, all withdrawals from 529 plans will be free from federal income taxes, as long as the money is used for a qualified college or graduate school expense of the beneficiary you’ve named. Withdrawals for expenses other than qualified education expenditures may be subject to federal and state taxes and penalties.
Furthermore, you have complete control of your 529 plan assets. You decide who will get the money and when he or she will get it. You can even change the beneficiary to another family member.
Although a 529 plan will be counted on the Free Application for Federal Student Aid, schools typically only consider about 5.6 percent of parental assets when calculating financial aid. And distributions from a parent-owned 529 account used for one year’s college expenses will not usually reduce the next year’s financial aid eligibility. (Financial aid is a highly specialized field. For more information on how a 529 plan might affect your child’s financial assistance, consult with a college’s financial aid office or work with a qualified financial aid expert.)
While you may want to do every-thing you can to help your children attend college, you can’t forget the need to save for your own retirement. Consequently, you may need to balance your investments in a 529 plan or other college-savings vehicle with contributions to your IRA, 401(k) and other retirement accounts. However, unless you have limitless resources, this “balancing act” means you may not be able to put in as much as you’d like to your children’s college funds.
But your children have several ways of paying for school or reducing their educational expenses. Many students choose to attend a local community college for their first two years, earning many of their “general” credits at a fraction of the cost of a four-year college. And your children may be eligible for grants and scholarships.
If needed, they can also take out loans, though you obviously would like to limit their debt load as much
It can certainly be challenging to help pay for your children’s college education while simultaneously build-ing resources for your own retirement. But it can be done—with careful planning and a commitment to save and invest early and often. So, if you haven’t yet started, now is the time.
Craig Bolger is a financial adviser with Edward Jones in Independence, Mo.
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