As we start the New Year, one of the areas that parents will review, is how to send their children to college without going broke or working until age 75! We have seen ever escalating college tuition that far exceeds the recent cost of living increases and it should come as no surprise that a college education is expensive. The College Board — a nonprofit educational association — reports that for 2017-2018, the average tuition, fees, room and board, books and supplies for a four-year private college is $46,950 per year ($20,770 for a public in-state institution).1 How does a family of 4 save enough to send two children to college, and still sustain a reasonable lifestyle along with planning for their own Second Act in retirement?
In our work we always ask if grandparents are able to help support families in this area. While most parents are reluctant to ask, many grandparents are happy and pleased to be able to contribute. There are several methods that can be used, ranging from savings accounts, savings bonds, 529 plans, investment accounts, as well as life insurance. With the paltry interest received in savings accounts, and even saving bonds, one of the easiest method to save is to use a 529 plan, named after Section 529 of the Internal Revenue Code. It is a tax advantaged way to save, or even pay in advance, for college expenses.
Investing in Your Family-Your Greatest Asset
Starting a 529 plan comes in two varieties: a pre-paid plan and a savings plan. A pre-paid 529 plan allows the account holder to pre-pay all or part of the tuition and fees of an in-state college education. Pre-paid plans may also be converted for use at out-of-state colleges. A 529 savings plan works similarly to a Roth IRA and offers investment options similar to mutual funds. Its value can rise and fall based on the performance of the investment option chosen. However, if started early enough (by age 1), your account has 17 years to grow to support your children or grandchildren as they start college at age 18.
Earnings in a 529 plan can be tax deferred, with withdrawals being exempt from federal and state income taxes, if you use the funds for qualified expenses such as tuition, fees, room and board, and supplies. Some states also offer state tax deductions, or tax credits, on top of that. Specifically, Kansas, Missouri, Montana, Arizona, and Pennsylvania, allow the deduction for contributions to any state’s plan. Please check with your tax accountant in your state to ensure that you understand any tax benefits that you are allowed.
While it’s wonderful to give our children and/or our grandchildren new shiny toys or the latest electronic gadget, please consider the gift of education, a gift that will keep on giving throughout your children’s lives. This is a great way to build and keep your legacy through supporting family.
The other benefit of a grandparent’s gift is that, the funds may be held in such a way to avoid being counted when your grandchild applies for aid and for certain scholarships.
The question that is always asked, “what if my child does not go to college or use the funds?” Should there be money left in an account that goes unused, the funds can be transferred and used by a family member for their education. Another point to consider is how many children today continue to get their masters or PhD degrees or professional designations since 529 funds can be applied for graduate and professional degrees as well.
529 savings can also be used for any accredited in-state, out-of-state or international educational institution. And while some education investment vehicles have age restrictions, a 529 plan has none, so anyone can benefit from one.
As a working parent, I was very grateful to my parents, who funded two 529 accounts for my daughters’ education. We are just starting to use the funds and are very grateful to have these accounts to allow us to continue to plan for our retirement and give us some flexibility. While we opened a 529 account for our first daughter, we did not start one for our second daughter due to me starting my new business. I am deeply grateful and appreciative for the sacrifices that my parents made for our children. My parents were not wealthy and were firmly in the middle class, but were able to see that they could afford to save on my children’s behalf. It is a gift that will keep on giving.
Take Action and Plan for College Today
529 plans are easy to start and to manage. You can do it yourself (DIY) or you can work with an advisor. There are many choices and good information sources. One source is www.savingforcollege.com. Start today and know that one step and one action will produce more positive steps in the direction you desire.