Parents with young children often think that the diaper stage will never end, but before you know it, your child is out of diapers and starting kindergarten. Time begins to move faster, and then it seems, within a blink of an eye, your child is graduating from high school. You are then tearfully and sometimes joyfully dropping them off at college, scratching your head wondering where the time has gone.
That is why it is important to have college planning as one of your top financial planning objectives. Trust me when I say, being able to pay for the high cost of education will make the college decision a much more pleasant experience for the entire family. With education expenses on the rise at more than twice the pace of normal inflation, prudent college planning is more important than ever. Today, private universities command close to $60,000/year and some even more.
So, how can you best prepare for this significant life event? Education planning is best started soon after your child is born and has a social security number. Yet, if you haven’t gotten around to starting, it’s really never too late. As for investing, it’s generally appropriate to take more risk while your child is young and there is time to weather a market downturn. Adding money on a regular basis is also a productive idea because it will average out some of the ups and downs of the stock market. When your child is within a few years of college age, you may want to begin reducing the investment risk.
One of the common savings vehicle used to cover secondary education expenses is the 529 Plan. It is a plan that allows money to be invested and grow tax-free as long as the funds are used for secondary education. The minimum contributions are very low and you can sock away up to $14,000 every year. There is also the option to pre-fund contributions, which would allow you to make a single contribution up to $70,000, after which you'd have to wait five years to add additional funds. 529 plans grow tax-free and upon distribution there aren't any taxes on the gains, as long as the funds are used for secondary education. There is a 10% penalty for not using the withdrawal for qualified education expenses and possibly a state penalty. If the withdrawal is considered non-qualified it will be subject to federal income tax. This could mean a technical or trade school, community college or four-year university. Let's say you were to invest $100,000 in a 529 plan and it grew to $350,000. The $250,000 gain would NOT be taxable, as long as the funds are used for secondary education. (This is a hypothetical example and is not representative of any specific investment. Your results may vary.)
The challenge for parents with young children is trying to guess what the future will look like. Will your child go to a trade school, a state university or a private university across the country? Should you plan on $10,000 of annual tuition (in today’s dollars) or $60,000? Will there be athletic or academic scholarships? Some of these answers will just take time, so focus on determining an affordable monthly investment amount and get STARTED! You can always adjust as you go along. If you’re fortunate enough to have over saved, the 529 plan beneficiary can be changed to another child.
If you set your sights on a private university, plan on saving around $1000-$1200 per month. This assumes that college expenses continue to rise at about 5% per year and it also assumes that you are investing for 18 years and earning an average return of 8%. One of the most important objectives is to start a plan with automatic monthly contributions so that every month a pre-determined amount comes right out of your checking account and goes directly into your 529 Plan. You’ll get used to this ongoing expense in a relatively short period of time. A great resource to learn more about college planning is Joe Hurley’s site: http://www.savingforcollege.com/ . Remember, an important step is to start NOW!
*Prior to investing 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits 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 Securities offered through LPL Financial, Member FINRA/SIPC. The LPL Financial Registered Representatives associated with this site may only discuss and /or transact securities business with residents of the following statesShare on Twitter Share on Facebook