Its Time To Get Serious About Saving For College
Its never too early to start thinking about a college savings plan. Whether your child is a teenager or toddler, the best time to start a college fund is now .
Making the right plan for your childrens future starts with understanding all of your investment options. Connect with a qualified investment professional for free through SmartVestor. These are people we trust to take care of you and your childs college investment.
Want to learn more about how to go to school without loans? Debt-Free Degreeis the book all college-bound studentsand their parentsneed to prepare for this next chapter. Grab a copy today or start reading for free to get plenty of tips on going to college debt-free!
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Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
College 529 Savings Plans
A 529 college savings plan, also known as a qualified tuition plan, is one of the best choices for a college fund for baby. The 529 plan allows you to save money for future education expenses and, as an added benefit, it is tax-advantaged. Even though the federal government does not allow you to deduct the contributions you make to a 529 plan on your federal tax return, those contributions are often deductible on your state tax return. In some cases, a state may offer a tax credit instead. The rules regarding tax-deductibility of contributions are made on a state-by-state basis.
When choosing a College 529 Savings Plan, be sure and choose one that is flexible. That means you can move your money between mutual funds within the plan. If you choose a plan that is fixed or life phase, you wont be able to stay in control of your money. The amount of your contribution per year is not specified except that the law says you can only contribute up to the expected amount of education expenses. The lifetime limit on contributions to a College 529 Plan is $235,000 to $529,000, depending on the state in which you live. This college fund for baby stays in the name of the parents.
Set A Goal For Saving
Maybe you feel its appropriate to commit to funding 50%, and letting your kids come up with the rest through part-time work, scholarships and grants, or student loans, says Eric Roberge, a CFP and founder of Beyond Your Hammock, a wealth management firm in Boston. This is an individual choice that is up to you and your family, and theres no wrong answer here.
The cost of college tuition is increasingly complex, so figuring out how much your childs tuition will be can be a challenge in itself even more so if youre trying to plan for how much college will cost in 10-15 years. Scholarships, federal aid, and what college your child attends will all impact what the final bill will be. The current average cost $35,720 per student at least offers a reference point in determining how much you aim to save.
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Ways To Save & Invest For College
Just as you want to combine multiple sources of funding for college costs, you should also combine multiple investing strategies for setting aside your own money.
Many middle-income parents jump straight to 529 plans and Coverdell Education Savings Accounts and ignore other options. These tools have their roles to play, but they also come with usage restrictions.
In a perfect world, you dont pay a cent in net tuition costs because you and your child cover them through more creative options. In that case, the money you set aside in the investment vehicles below can go toward your retirement and your childs inheritance, rather than contributing to administrative bloat at your childs college.
What Type Of Savings Account Should You Use
There are three types of specialized college savings accounts: 529 college savings plans, prepaid tuition plans and Coverdell education savings accounts.
Of these accounts, 529 plans offer the best mix of tax and financial aid advantages.
- Favorable tax treatment. Like a Roth IRA or Roth 401, contributions are made with after-tax dollars. Earnings accumulate on a tax-deferred basis and are entirely tax-free if used to pay for qualified higher education expenses. Unlike a Roth IRA, more than two-thirds of the states offer a state income tax deduction or tax credit based on contributions to the states 529 plan.
- Favorable financial aid treatment. If a 529 plan is owned by a dependent student or the dependent students parent, it is reported as a parent asset on the Free Application for Federal Student Aid and distributions are ignored. Parent assets are assessed on a bracketed scale, with a top bracket of 5.64%. This yields a less severe impact on eligibility for need-based financial aid than student assets, which reduce aid eligibility by 20% of the asset value.
529 plans have generous contribution limits. 529 plans have special estate-planning benefits, such as superfunding . 529 plans do not have income restrictions.
Almost all states offer at least one 529 college savings plan. Most states offer a direct-sold 529 plan and an advisor-sold 529 plan. Direct-sold 529 plans are offered directly by the state. Advisor-sold 529 plans are offered through financial advisors.
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Section 529 Education Savings Plan
If you have a higher risk tolerance, it might make sense to use a 529 Education Savings Plan rather than a Prepaid Tuition plan. You will have more flexibility in where your child attends school, and you might also get a state tax break for contributing.
With a “regular” 529, you’re able to invest the money in stocks, bonds, mutual funds, or ETFs and take advantage of the potential growth. You might even be able to make up for starting late with the help of a solid bull market run. The money grows tax-free as long as it’s used for qualified education expenses.
However, you also run the risk of losing out if your child needs to take distributions during a period of market volatility. You can reduce some of your risks by shifting assets to bond funds and other less-risky investments as your child gets ready to attend school.
Consider asking relatives to contribute to your childs college fund. By redirecting their generosity into a Section 529 account, theyre giving a gift that truly keeps on giving. Many of the states that permit tax deductions for funding a college account allow a person to take the deduction even if it is not their child going to college. Further, the IRS allows individuals to gift certain amounts each year, which allows wealthy grandparents to slowly reduce a potential estate tax burden.
Invest Your Savings Tax
Nearly 7 in 10 parents arent familiar with a 529 college savings plan and they should be.
Putting it simply, a 529 college savings plan can help your savings go further. Its a tax-advantaged investment account that works like a Roth IRA, offering tax-free growth and tax-free withdrawals. And yes, parents can open a 529 plan for their childs college savings. Its not just for grandparents!
Most 529 plans also offer a passively invested, age-adjusting portfolio option that starts with higher growth investments and becomes more conservative as your child approaches college. This means your money grows over time, but youre also reducing risk as it becomes time to pay for college.
What difference do these tax savings and investment gains make? If you have a 4-year-old child targeting a private university, your monthly savings goal might be $700/month using a savings account versus $400/month with a 529 college savings plan. Thats a big difference!
There are a lot of 529 plan options, but investing doesnt have to be complicated. Here are a few guidelines in case youre doing the research yourself:
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How Much Does College Cost
Currently, the average cost of tuition and fees for four years at a public, in-state college is $42,240. For an out-of-state public program, the average cost is $108,080 for four years. If your child plans to go to a private institution, the average cost is $150,600 for four years. Room and board, which covers on-campus housing and meals, costs an additional $46,480 on average for four years at a public college and $52,480 on average for private, totaling $88,720 for a public, in-state college, $154,560 for a public, out-of-state college and $203,080 for a private institution. And, in all likelihood, those numbers will continue to ascend: Rates are expected to increase by at least 1% to 2% every year to keep in line with inflation.
Set Your Future College Savings Goal
The bad news is that college costs are expected to double again over the next 10 years. The good news? You dont have to save for the full cost. Shoot for one-third.
Why? The remaining two-thirds can be filled in by scholarships, financial aid and current income . This is a rule of thumb used by financial advisors across the country, and it can also save your sanity by making your savings goal a little more realistic.
Say youre planning for a child whos 4 years old today. Your college savings goal should be $60,400 for a public, in-state college $95,600 for a public, out-of-state college and $118,900 for a private college.
If these numbers seem daunting, dont worry. There are ways to break it down into an achievable monthly contribution. But first, heres a little secret that could cut your monthly contribution in half.
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When To Start Saving For College
The ideal answer to the question When is the best time to start saving for college? is NOW!
For some people that may not be possible. Thats particularly true for people who are in debt, havent set up retirement savings or dont have an emergency fund. Those three things should be higher priorities.
Dont panic if you arent able to start saving for college early. There are still options if you get a late start.
Financial experts recommend that the later you start, the more important it is to weigh tax implications. Savings methods with tax benefits can help cut the cost. There are a variety of methods that wont mean a tax hit, include 529 plans, Coverdell educational savings accounts, savings bonds custodial accounts and more.
Well look at them all in depth, but first, its important to know how much college will cost you and your future college student.
Take Advantage Of The Aotc
The American Opportunity Tax Credit allows you to knock up to $2,500 off your tax bill, per student, per year. It can be applied to you, your spouse, or your dependents. The first $2,000 of your college expenses earn you a dollar-for-dollar tax credit, after which you get a credit of $0.25 for every dollar you spend on tuition, up to another $500 in tax credits.
Keep in mind that a tax credit is far more beneficial than a tax deduction. Deductions come off your taxable income credits come off your actual tax bill. You can find more details about the American Opportunity Tax Credit and other college tax deductions and credits here.
Welcome To The Nyc Kids Rise Save For College Program
We are so excited to be working with families, schools, and communities to save for students futures, together.
It can be tough to save for college and career training. For many families, saving and planning for higher education may seem out of reach.
Research shows that children with even a small savings account of $1 to $500 are three times more likely to enroll in college and more than four times more likely to graduate. Research also shows that children who attend college earn a significantly higher salary over their lifetimes.
The NYC Kids RISE Save for College Program provides families, schools, and communities with a way to work together to save for their childrens futures. Its a scholarship and savings program designed to make college and career training more accessible and achievable for all NYC public school students, starting in kindergartenregardless of their familys income or immigration status.
Good news! If eligible, your child will be automatically enrolled in the Save for College Program unless you choose not to participate. You do not have to do anything to enroll and receive a free NYC Scholarship Account. If you do not wish to participate please visit the NYC Department of Education website for more instructions.
Flip Houses With Your Child
One way to pay for your kids college tuition while still making them chip in for it is by having them work on joint real estate investment projects with you.
Together, the two of you can scour listings, walk through homes, buy them, renovate them, and sell them. You get some quality one-on-one time with your son or daughter while teaching them valuable skills ranging from real estate investing to renovations and home improvement. They learn the value of hard work and have a real stake in their own education. And, of course, the two of you make some money to cover their tuition.
As with rental properties, flipping houses requires some education and work. If this tactic interests you, start with these five tips for effectively flipping your first house.
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Develop A Plan With A Financial Adviser
Over half of parents with children in 10th grade or higher wish they had saved more per month the median saved is $200 each month. Notably, those with a financial adviser saved a total of roughly $14,000 more than parents without an adviser.
A financial adviser can be a great resource when starting your child’s college fund savings. They can help you navigate the multitude of options available, including how to maximize your investments and make withdrawals the most effective when the time comes. When you work with a financial adviser, they can paint a clear path to college for your child with manageable savings goals. If you plan to apply for grants, scholarships or financial aid, a financial adviser can also help you with that process, and factor that into your college fund savings.
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College Savings And Financial Aid
Did you know that only one student of every 300 will receive a full scholarship to college?2 Most aid comes in the form of student grants and loans.
- Federal grants dont need to be repaid but are typically designed for low-income families. So, many students dont qualify.
- Student loans, which are much more common, have to be repaid within a certain time frame and incur interest with interest rates that are reset each year according to U.S. Treasury rates.
Some families worry that contributing to a 529 plan or other savings plans may hurt their chances of receiving financial aid. In reality, up to 5.64% of parent-owned assets excluding qualified retirement assets, your primary residence and insurance policies are considered in financial aid calculation, according to the U.S. Department of Education. Your financial advisor can show you different ways to save for education and will explain how different ways of saving may affect your overall financial strategy.
Federal financial aid is need-based and determined by one equation:
Cost of Attendance – Expected Family Contribution = Financial Need
The COA is the total cost of attending a particular school for one year. It includes tuition and fees, room and board, books and supplies, and transportation to and from school.
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How Much Money Should I Save For My Child
How much money you should save depends on a few factors. For one, there are a lot of variables to consider: How much will a university degree cost in X number of years? How long do you think your child will go to school for? What amount can you afford to regularly sock away for expenses?
If we use the earlier figures from CollegeCalc that forecast what a four-year education will cost in 2039 , its recommended you put $741 a month into a college savings plan. This calculation assumes an after-tax return of 7%, an annual tuition increase of 7% and four years of school.
If you plan on covering some, but not all college expenses, you can tweak this formula to suit your situation. For instance, Fidelity recommends targeting a savings goal of $2,000 multiplied by your kids current age if you plan on covering 50% of college costs and assume your child will attend a four-year public school. The financial institution provides a couple of examples of parents covering different percentages of fees and what that would look like at different ages of their children.
There are other online calculators that can help you determine what you should save, depending on what your childs future education plans might entail . Again, a financial advisor or certified financial planner can help you plan for college costs in way that accommodates your needs.
Traditional And Roth Iras
An IRA is a tax-advantaged savings account where you keep investments such as stocks, bonds, and mutual funds. You get to choose the investments in the account and can adjust the investments as your needs and goals change.
Under the SECURE Act, you can now wait until age 72 to begin taking required minimum distributions , and the law removed the age requirement for depositing money into a traditional IRA, so you can continue making contributions at any age if you are still working. In general, if you withdraw from your IRA before you are 59½ years old, you will owe a 10% additional tax on the early distribution.
However, you can withdraw money from your traditional or Roth IRA before reaching age 59½ without paying the 10% additional tax to pay for qualified higher education expenses for yourself, your spouse, or your children or grandchildren in the year the withdrawal is made. The waiver applies to the 10% penalty only you will still owe income tax on the distribution unless it’s a Roth IRA.
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