Saving for College
College is one of the most expensive purchases a family will make. If you look at current college costs now, while your child is young, there’s no way to predict how much those fees will increase in 15-18 years. That’s why it’s so important to save for college as early as possible, even if your child is just an infant! The earlier you start saving, the more time you’ll have to accumulate funds, harness the power of compounding interest, and grow your investment. In this article, we’re going to discuss how parents can plan and save for their children’s college education.
No matter how much research you do now, there is no way to know exactly how much college will cost in the end. Consider creating an approximate budget for potential expenses such as tuition, room & board, books, school supplies, transportation costs (depending on location), etc, and take into account how many children you have that plan to partake in higher educational studies so you can roughly estimate what your savings goal will be. Remember to include a contingency budget as well!
For continuous saving over time, start by adding all your income and then deduct your fixed and variable expenses. From the amount left over, determine how much you would like to save specifically for your child’s higher education costs and commit to putting away that amount on a schedule. An easy way to manage savings is to set up automatic transfers every month into your HOMEBANK savings account!
For saving on a more infrequent schedule, such as annual contributions, estimate how much you would like to have saved by the time your child will enter college. Determine how many years until then and plan to allocate that quotient amount annually so you will reach your savings goal!
*Tip: As your child gets older and moves into teen years, talk with them about the cost and create goals for how much they want to save each month. This will help them feel more engaged in their college planning process.*
The earlier you start saving for college, the more time your money will have to accumulate funds from contributions and interest. If you want your child to be more involved in the savings process, open a regular savings account for them at HOMEBANK, have them make deposits and keep track of their savings! It’s a great option to deposit cash and checks received from birthdays, holidays, or allowance. Engage your child in their own future and teach them the value of healthy saving habits at an early age.
Besides regular savings accounts for your children, alternative savings vehicles exist that offer added benefits. A qualified tuition plan (QTP), often referred to as a 529 plan, is a tax-advantaged investment account that many states offer to help families save for college. A 529 plan allows the funds to grow tax free.
When needed to pay for qualified education expenses (tuition, books, room, board), funds can be withdrawn tax free as long as the funds withdrawn are not more than the cost of the education expenses. In addition, contributions can be tax deductible on a federal level and, in many cases, state wise as well.
In the state of Illinois, for example, you can deduct up to $10,000 a year from your state income tax return per individual for contributions made to a qualified Illinois 529 plan. In Missouri, the state deductible amount is $8,000 per year per individual.
The individual to receive the deduction is the one making the contribution into a qualified 529 account. Beneficiaries do not report contributions as income and the custodian of the account retains full access to the account to be able to manage it accordingly.
On the federal income tax level, you may exercise the annual gift tax exclusion and contribute up to $15,000 per individual. There are no annual limits you can contribute to a QTP per se, but if you gift more than $15,000 as an individual in one tax year, it may count toward your lifetime estate exemption.
You can open a 529 Plan with any financial institution offering one and then invest in it using cash, stocks, mutual funds or bonds – whatever your most comfortable with! 529 Plans can be a valuable estate planning strategy. Always talk to your accountant and/or estate planner for details about how to best contribute and maximize deductions for your child’s or grandchild’s higher education.
An alternative vehicle for parents to help save for future tuition expenses is a Roth IRA. A Roth IRA allows you to contribute after-tax dollars into a qualified retirement account and be withdrawn to pay for your child’s education costs. If you’re under 59 ½, the earnings may be taxable, but there is no early withdrawal penalty as long as the funds are used for education expenses.
If your child is a teen and ready to start college shortly, don’t forget that there are many scholarships available, as well as organizations that offer grants too – such as private companies, unions, and community organizations. If you don’t have a savings account already for your teen to help pay for college, don’t be discouraged: talk to a guidance counselor or college financial aid office for options to fund your higher education learning.
For more information on qualified tuition programs, visit the IRS’ page on the topic.
These strategies will help make planning and saving for college easier, but it’s important not to set expectations that might be impossible! Parents need to talk with their children about college expenses early and work together later on so that both parties understand the commitment and resources needed to attend college or university.