One Account That Can Do Both
While 529 savings plans are one of the best investing options for parents who want to save for their child’s education because of the tax benefits they offer, there is another investment vehicle to consider. Parents who want to prioritize investing for retirement can also use money from their individual retirement accounts to help finance their child’s college education.
Normally, if you withdraw investment gains from an IRA before you’re age 59 and a half, you’ll have to pay a 10% penalty fee.
However, if you withdraw your investment gains from a Roth IRA that’s been open for five years or more, you won’t have to pay a 10% penalty fee or income tax if you’re using the money for qualified higher education expenses.
And for Roth IRAs that have been open for less than five years and traditional IRAs , you won’t have to pay a penalty fee, but you may have to pay federal and state income tax for education expenses. Qualified higher education expenses include tuition, fees, books and supplies.
If you’re looking for one company that offers you investment accounts for both retirement and college, you might want to consider Wealthfront, which offers 529 savings plans, individual retirement accounts and a robo-advisor investment vehicle.
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Tools and calculators that show users their retirement goal progress Fidelity Five Money Musts online game to teach you about managing money in the real world
Choose The Right Goal For You Then Get Started
When it comes to paying for college, the earlier you begin, the better. But getting started can be overwhelming. The price of college is risingthe cost of college has grown faster than than the overall basket of goods and services that people generally buy since 1980and theres a host of other unknowns to plan for. Should you choose a public or private university? Should you stay in-state or go out of state? Could your child get scholarships? What about grad school?
Luckily, you dont need to know the answers to all these questions to start saving. Here are a few of the most helpful strategies for deciding how much to save for college.
Ask Carrie: How Much Should You Save For Your Kids’ College
My two kids arent even in school yet, but the cost of college already scares me. I dont want them to wind up graduating with a lot of student loans like I did, but I dont see how Im ever going to come up with the money. How can I save enough?
Looking at todays college costs can give a parent sticker shocklet alone what it could cost when your young kids are college age. But while the numbers can be daunting, the reality is many parents today pay far less than the published prices for both public and private colleges. With the costs of college getting a lot of scrutiny these days, that may be even truer in the future. This doesnt mean you dont need to save, it just means you may need to save less than you think.
Whatever future costs may be, saving early and using a tax-advantaged account like a 529 can be a smart way to prepare. But before we look into some of the details of a 529 college savings plan, lets look at some current stats you may find encouraging.
There can be a big difference between sticker price and what you pay
Paying for college isnt all on the parents
Student debt is a heavy burden for a lot of college grads as you well know, but there are other ways to cover college costs beyond loans and parents savings and income. How America Pays for College 2020 reports that while parents generally picked up 44 percent of the bill for the 2019-20 academic year, the rest was covered by:
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How Much Student Loan Debt Should You Take On
“If the parents aren’t planning on repaying their child’s student loans, they should help ensure the child limits their student loan borrowing to a reasonable amount that they can afford to repay,” says Kantrowitz. “If the total student loan debt at graduation is less than their annual income, the student should be able to repay their student loans in 10 years or less.”
For parents who plan on paying off their child’s student loans, Kantrowitz recommends this general rule: You should borrow less, for all of your children, than your combined annual income.
For example, if your household’s combined annual income is $150,0000, and you have three children, you should not take out more than $150,000 in student loans, in total, for all of your children . By keeping the debt load low, parents should be able to pay off their child’s loans in less than 10 years. If parents are closer to retirement , they should not take out more than roughly half of their annual income in loans.
Savings By Family Education Level
In general, the higher the parents education level, the more they will save for their childs future college expenses. Education level also affected how much parents think they need to save to secure their childs college expenses.
- Parents without a college degree predominantly invest in pre-paid plans roughly 26%.
- Parents with an Associates degree mostly invest in 529 plans 13% of them.
- Parents with a Bachelors degree mostly invest in 529 plans 38% of them.
- Without a degree, families seek to save $35,984 for their kids college.
- With an Associates degree, families seek to save $32,091 for their kids college.
- With a Bachelors degree, families seek to save $74,767 for their kids college.
- Parents without a college degree save $4,338 annually.
- Parents with an Associates degree save $5,499 annually.
- Parents with a Bachelors degree save $6,978 annually.
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Say No To Student Loans
When you complete the FAFSA, youll start getting offers from banks that will be more than happy to help you pay for college. In fact, some financial advisors actually tell their clients to count on paying for part of their college expenses with student loans. Listen, its this advice that has led Americans to carrying around 1.58 trillion in federal student loan debt.6
Bottom line? Debt is a threat to your kids financial futures. Student loans only help your kids start out in the negative. But get this: Going through college debt-free really is possible.
These lenders claim theyre more than willing to help you out. Lets look at the real costs of that so-called student loan help. In 2020, the average student loan borrower carried about $38,792 in student debt.7
So, what will paying off that debt look like?
Assuming you have a 10-year payment plan and an interest rate of 6%, youd be paying just over $400 a month. And throughout those 10 years, youd pay almost $13,000 in interest. So, that help in the form of a nearly $39,000 loan cost you almost $52,000. If you do the 20-year payment plan, youd pay only $278 a month, but youd end up paying close to $30,000 in interestalmost the original loan amount! Paying nearly double for a degree? No, thank you!
How Much Money Should I Be Saving After College
Its never too soon to start putting money away for retirement. The earlier you start saving, the more time you have to harness the power of compound interest, which means a little saving today can lead to a lot of cash down the road.
But how much should you be saving? Many people follow the 50/30/20 rule. According to this rule, you should reserve 50 percent of your after-tax pay for essentials like rent, utilities, food, transportation, insurance, and loan payments 30 percent for personal, discretionary spending and 20 percent for savings and debt repayments.
If you’re wondering how to break down that 20 percent youre saving, here are a few safe bets:
1. START AN EMERGENCY FUND.
Many personal finance experts will recommend stashing away three to six months worth of expenses in a savings account. That way youll have cash on hand in case you lose your job, need to repair your home, or have to fix your car. Calculate your monthly cost of living and divide that number in half. If you can save that amount monthly, you will have a six-month emergency fund saved within a year.
2. START CONTRIBUTING TO A 401K.
3. MAKE EXTRA PAYMENTS ON LOANS OR DEBTS
Remember, every persons finances are different. The 50/30/20 rule is just a guideline, so dont panic if you cannot get your budget to match it. Do the best you can, but do your best to start saving for retirement as early as you can.
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Every Family Has Different Savings Goals
Our 2K rule of thumb is an easy way to see whether you are on track, especially if your children are still young and you are not sure where they will ultimately choose to go to college, says Andrey Lyalko, a vice president at Fidelity. Because this approach may not apply to all situations, make sure to develop a robust college savings plan and be mindful that college costs are a variable that can dramatically change over time.
So what if your situation differs from the norm? Perhaps you are hoping for a sports scholarship for your aspiring student athlete. Or maybe you are looking to cover 100% of college costs and are not expecting any scholarships or grants. You may also believe that your child will go to a private college, where the costs could be substantially more than the average public university.
The college savings math can still work for you:
What Is A 529 Plan And Other Considerations
Once you start looking into education savings accounts, youâll probably hear one number over and over: 529. Named for the section of tax code authorizing them, 529 plans are tax-advantaged savings plans designed for education expenses.
There are two types, a 529 savings plan and a 529 prepaid tuition plan. All 50 states and the District of Columbia offer at least one of those two types , and depending on where you live, you may be able to deduct both kinds of 529 contributions from your state income taxes.
Deductible 529 contribution limits vary by state. In 2021, you and your spouse can each give up to $15,000 per child before you face additional taxes for large gifts.
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How Much Should You Save For College
“How much should I save for college?” Helping families throughout the year with college planning, we hear this question frequently. And it’s a critical one to ask. Saving for college is one of the most important things you can do with your money, as putting aside funds for college now will help reduce the need to borrow later on. But how much should you save? While every family ultimately needs to determine that amount based on their own goals and finances, here are a few tips to help you get your financial house in order and make a smart college savings plan.
Breaking Down The Process: How A 529 Affects Financial Aid
You fill out a FAFSA form, providing information about your financial situation.
Administrators calculate your expected family contribution, which is how much youâll have to pay out of pocket.
Depending on your age, youâll have an asset protection allowance, which is a certain amount of savings that donât get factored into the formula . For the 2021-2022 school year, the amount for a two-parent home was $5,500 if youâre 40 when your child goes to college, up to $10,500 if youâre 65 or older.
Money in retirement accounts also doesnât count, which is good news for you.
The rest of your savings are assessed at up to 5.64 percent, including money in any 529 plans. So, if youâve saved $10,000 above and beyond your asset protection allowance, your financial aid package would only get dinged by up to $564.
Anyone telling you that a 529 education savings account will hurt you is essentially saying, âDonât bother saving $100, because youâll only get to use about $95.â
One important caveat: Encourage grandparents to contribute to a 529 plan you open, rather than creating their own. Funds from separate 529s will look like âstudent incomeâ and take a much bigger bite out of your financial aid.
What you can do today: Decide on a basic savings goal. Even if it isnât sky-high, think about what you can afford and make a commitment to contribute that much each month. Bonus points? Set it up through autopay so you know youâll do it, no matter what.
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Saving More Can Have A Huge Impact
This hypothetical illustration assumes an annual 6% return, as well as a weekly deposit for 18 years, for all examples. This illustration does not represent any particular investment nor does it account for inflation. There may be other material differences between investment products that must be considered prior to investing.
The True Cost Of College
The federal government requires that all U.S. colleges and universities publish their annual cost of attendance . The COA includes tuition and fees, room and board, books and supplies, transportation, and personal expenses. If you already have a list of colleges in mind, knowing their COAs can give you some idea of how their costs compare.
But its important to note that a colleges official cost of attendance is like the suggested retail price of a product thats frequently sold at a discount or like the sticker price on a new car. The reality is that many students and parents pay considerably less.
Whats more useful to know is the colleges net price, after taking into account any grants and scholarships for which the student may be eligible. While student loans are also touted as financial aid, unlike grants and scholarships, they eventually have to be paid back with interest. Rather than reducing your cost, student loans increase it in the long run.
The College Boards annual Trends in College Pricing report shows the stunning difference between what many colleges say they charge and what they actually charge. For the 2019-2020 school year, for example, the average published tuition, fees, and room and board at four-year public and private colleges looked like this:
- Public four-year : $21,950
- Private nonprofit four-year: $49,870
But the average net prices, after accounting for grant aid and tax benefits, looked like this:
- Public four-year : $15,380
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Paying For College: How Much Is Enough
11 Minute Read | September 16, 2021
When youre a parent, the worries that keep you up at night are seemingly endless. They range from the little stuff like choosing between T-ball and gymnastics to the big stuff like going to school and how much to save for college.
If youre worried about T-ball and gymnastics, college probably seems like a long way off. But the things you can do now will definitely pay off later.
Listen: Saving for college doesnt have to be stressful. You can send your kids off to school without debt, student loans or private loans. You just need to learn how much you should save for college so you can start nowno matter where youre starting.
Here are some basic steps you can follow to start saving for your kids college:
Lets start by calculating the costs.
How Much Should You Save For Your Childs College Education
- How Much Should You Save for Your Childs College Education?
Every parent looks forward to milestones in their childs life. But high school graduation can also be a frightening time for families. During the 2016-2017 academic year, private universities cost an average of over $41,000. When facing the prospect of paying around $164,000 over four years, its understandable that parents and students alike worry about financing higher education.
Most parents worry about saving for college. Yet, many parents do not know how much money to save or how to set aside funds. Luckily, there are several ways to figure out how much you should save for your childs college education.
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