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As a parent or guardian, you are likely aware of the rising cost of college. And while it is difficult to predict the exact cost of college in the future, we do know that this figure will increase at a rate that surpasses inflation. Paying for it, therefore, requires serious planning.
There are several things you can do to maximize your child's chances for a successful future. And choosing the right college savings plan can put you well on your way to achieving your goal of a college education.
Equitrust Financial Group is your partner in investing, managing, preserving, and distributing the resources you have worked hard to accumulate. How and when you take action with your wealth can have a profound effect on not just your own financial goals, but also the lives of future generations – including your children's education.
A college savings plan is an investment account that's specifically designed to help you save for college expenses. The money you put into it grows tax-deferred, and you can withdraw funds tax-free for qualified education expenses.
College savings plans can help you pay for education expenses, including tuition and fees, books and supplies, room and board, and even computers. But the type of account you use can have a big impact on how much you save. Here are four popular types to consider:
Coverdell Education Savings Accounts (ESAs) can be used for elementary and high school expenses in addition to college costs. However, annual contributions are capped at $2,000 per beneficiary and phased out for higher incomes, which makes them less attractive than 529s.
Custodial accounts (UGMA/UTMA) are similar to ESAs but aren't limited by annual contribution caps or income phaseouts. As a result, you can contribute more money and have a broader investment selection available through custodial accounts than with ESAs.
Roth IRAs can be used to save and invest for college because they allow withdrawals of contributions at any time without tax or penalty — even before age 59 1/2. However, you should have owned the account for at least five years. The catch is that they generally have to be funded with earned income.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
A 529 savings plan is an investment account designed specifically for saving for college. These plans offer tax advantages and flexibility that make them a great choice for many families.
Unlike other investment accounts, earnings in a 529 grow tax-free, provided they are used to pay for qualified higher education expenses. Distributions made from the account are also exempt from income taxes when used to pay qualified education expenses. The definition of qualified higher education expenses has changed over the years and now includes tuition, textbooks and supplies, room and board, and even some computer expenses.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
How a Financial Planner Can Help
A college education is one of the most significant and costly investments you can make.
Setting up a plan and making your first contribution is relatively straightforward; after that, you'll have to decide how much and how often to contribute. If you're like most people, you'll likely need some guidance along the way. And this is where financial planners come in.
The right financial planner can make all the difference. They will help you look ahead so you can plan for your child's education now, as well as your retirement later.
When Should You Start College Planning?
The best time to start saving for college is as soon as you have someone to save for. For parents, this could be right when your child is born – or even before if you're expecting! If you start saving early, a portion of each monthly contribution will accrue into earnings by the time your child reaches college age.
However, if you wait until junior year of high school, you will either have to dip into your retirement savings or mortgage the house to pay your child's education expenses. Every dollar that you save today is worth more than a dollar saved later.
How Do I Start a College Plan?
First, find out which college savings plan is right for you, based on your family's financial situation and the age of your kids. The next step is to select a beneficiary (you can change this any time). Finally, open an account and establish your portfolio.
A financial planner can guide you through this process.
Are College Planners Worth the Money?
Whether or not you hire the services of a college planner depends on your personal preference and financial situation. However, it's worth noting that these professionals are essential in guiding you through the process and helping you avoid any costly mistakes along the way.
No strategy assures success or protects against loss. Investing involves risk including loss of principal.
There's no time like the present to start saving for your child's college education. But where do you begin? The good news is that you have several options. We'd like to help you prepare for that day and for your child to have the very best opportunities.
A college education is one of the best investments you'll ever make in your child's future. Get started now and find a college savings plan that meets your family's needs. Contact us today for more information.