Make A Budget & Cash Flow Statement
I cannot stress enough how important it is to budget and make a cash flow statement when saving for college. Many people think that a budget is the same as a cash flow statement and interchangeably use the terms.
In reality, a cash flow statement shows how much money is coming in and out. Establishing your fixed and variable expenses budget is used after assessing your cash flow statement and deciding where you can trim some dollars to add to your savings.
Check out this video to see how to create an incredible cash flow statement so you can start to budget.
Open A Savings Account
If your student is serious about building up their college savings, theyll need a safe place to keep all that money. Most banks offer accounts specifically for students, which usually means waived monthly maintenance fees and no minimum balance requirements. If your child is under 18, youll need to be the joint account holder.
What If My Child Doesnt Want To Go To College
Truth: You always have access to the funds saved in your Ohio 529 account and you always have options.
First, 529 plans can be used many types of higher education, not only four-year colleges or universities, but also two-year community colleges, trade or vocational schools, apprenticeships, and certificate programs. So, if your child wants to attend a welding school after high school, you can use your 529 plan to cover qualified costs there as long as the institution accepts federal financial aid. Again, make sure the school has a Federal School Code on FAFSA in order to use your 529 funds there tax-free.
What if your child chooses to attend a military academy after their high school graduation and, therefore, will not need their college saving account? You may make a non-qualified withdrawal up to the estimated cost of attendance within the same calendar year at a military academy without incurring an additional 10% federal tax penalty. The earnings portion of this withdrawal will be subject to federal and state income taxes. Another option on how to continue to use this college savings fund is to change to beneficiary of the 529 account to another member of the family.
Also, there are no time limits on when you have to use a 529 plan so you can wait to see if your child rethinks their decision about wanting a higher education.
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The Pros And Cons Of A 529 Account
A 529 savings plan, which gets its name from the tax code, is the go-to option for investing for college because of the tax benefits it offers. These state-sponsored investment accounts give people the option of investing in different stock or bond funds, and you won’t pay taxes on your investment gains or when you cash out to pay for qualified educational expenses such as tuition, room and board, supplies.
Some states even consider 529 contributions tax deductible and some give parents a head start in investing for college New York, for example, gives all public school students $100 that’s invested in a 529 savings account.
While 529 savings plans have a wide range of benefits, there are a few downsides. The cash you invest in a 529 must be used for education expenses. If it isn’t, you’ll have to pay a 10% penalty fee plus income taxes on your withdrawals.
There are exceptions to this. You won’t have to pay the penalty fee if your child receives a scholarship or attends a U.S. military academy, says Kantrowitz. So if your child gets a scholarship, you can get access to the money you saved without having to pay any penalty fees.
Saving For College: 5 Costly Mistakes To Avoid
Opening a college savings account is a smart way to invest in the education of a family member, a friend, or even yourselfand it often comes with tax benefits.
A popular option is a 529 college savings plan. This investment vehicle was primarily designed to cover higher-education expenses with tax-deferred growth and the potential for tax-free qualified distributions. Almost all states and the District of Columbia offer some type of 529 plan. Although youre not restricted to your own states plan, you should always consider the tax benefits provided by your state before investing in anothers.
A 529 plan doesnt guarantee that youll save enough to pay for tuition by the time the first bill comes due. It still requires careful management, such as determining your contribution rate and how to invest your contributions, between the time you set it up and when you begin to pay tuition.
You can help improve the benefits you receive from investing in a 529 plan by avoiding these five common mistakes.
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Where To Find The Money To Save For College
Now that you have a basic understanding of the order of operations – it doesn’t help you at all if you also can’t find the money to save for college. Beyond the technical details, this is the more challenging aspect of the equation.
However, it’s important to remember that paying for college is a pie – made up of lots of slices. The slices include the parent’s income, the student’s income, education savings , student loans, and more.
The goal, of course, is to save as much as possible so you can minimize debt.
Here’s where to start, and the amazing thing is, you don’t need to find the money in your own budget. There are a few great ways to find money to save for college where other people pay!
Commit To A Monthly Contribution
But how much should you be saving right now? Lets assume you are shooting for one-third of the projected cost of college, and youre using a 529 college savings plan to invest your savings and gain its tax advantages over time. If youre saving for a 4-year-old child, here are your estimated monthly contributions.
- Public : estimated $210/month
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How To Use A Roth Ira To Save Money For College
The cost of a college education continues to soar with no end in sight. College tuition rises at more than twice the rate of inflation, growing by about 8% per year, on average. At this rate, the cost of a college education will double every nine years.
This has many parents understandably concerned about paying for their childrens higher education especially parents of young children who might be a decade or more away from starting college. The good news is that there are a variety of different savings vehicles available to help you save money to pay for college down the road.
529 Plans: Pros and Cons
529 Plans: Pros and Cons
Section 529 plans are one of the most popular college savings vehicles. These accounts allow you to save money on a tax-deferred basis while investing funds in market instruments to potentially grow your savings. Also, there are no annual limits on contributions to 529 plans and no income limits for opening a plan.
But theres one potential drawback to 529 plans: The money you save must be used for qualified education expenses. If your child decides not to attend college or receives scholarships or other financial aid and doesnt need the savings to pay for college, the funds will be subject to taxes and a 10% penalty when withdrawn.
Roth IRA Nuts and Bolts
Roth IRA Nuts and Bolts
What About Retirement?
What About Retirement?
Can You Open a Roth IRA?
Can You Open a Roth IRA?
How 529 Plans Work
States run the 529 plans. You set up an account and choose how to invest the money. Contributions are made with money that has already been taxed. But the money grows tax-free and is also withdrawn free of income and capital gains taxes as long as it is used to pay for qualified higher education expenses . As an added bonus, 34 states, plus the District of Columbia, offer a state tax benefit on contributions to the plans.
For example, in New York
- New York State provides an annual deduction of up to $5,000 for amounts contributed by the account owner to one or more 529 savings accounts.
- Consider a married couple with income of $150,000 who contribute $125 a month. That would produce a state tax deduction of $1,500, or savings of about $100 annually over 18 years, the New York state tax savings can total more than $3,000, assuming the annual tax savings are invested and earn 6 percent annually.
- Ohio provides a state income tax deduction of up to $4,000 for taxpayers, regardless of their filing status, for each beneficiary each year.
- Consider a married couple with $75,000 in income who contributes $100 a month. They would receive an annual state tax deduction of $1,200, saving them about $40 annually. Over 18 years, the tax savings could grow to $1,300, assuming the money is invested and earns 6 percent annually.
The various 529 plans can vary widely in their costs and quality, but they all have the same underlying benefits:
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What Can I Use The 529 Plan For
The Prepaid Tuition Plan covers college tuition but does not cover the costs for elementary and secondary schools, or anything else really. On the other hand, Education Savings Plans cover more expenses, including tuition fees, accommodations, food, books, materials and K-12 tuition fees at public and private schools. Note that health insurance, student loan repayments and transportation costs are not considered qualified expenses by either plan. If the money is withdrawn and used for a non-qualified expense, you can generally expect to pay state and federal income taxes and an additional 10% federal tax penalty on your earnings.
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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.
Tips On Saving For College
- Financial advisors can be a valuable sounding board when planning for college costs. They can help you understand what programs are available and which are best for your situation. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
- With college costs rising faster than inflation, you can use our inflation calculator to get a better estimate of what college costs will be when your child graduates high school.
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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.
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.
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Safeguarding Your Information And Online Transactions Strong Technologies And Technical Controls
We use the following methods to help keep your online transactions and personal information safe and secure.
Username and password requirements
To help prevent unauthorized access, we prompt you to create a unique username and password when you first access your account. A password is a string of characters used to access information or a computer. Passwords help prevent unauthorized people from accessing files, programs, and other resources. When you create a password you should make it strong, which means it should be difficult to guess or crack. See below for hints in creating a password that would be difficult to crack.
A Strong Password
- Minimum of eight characters long
- Includes numbers, symbols, upper-case and lower-case letters
- Does not contain your username, real name or company name
- Does not contain a dictionary word
- Is significantly different from the previous passwords
Image verification during login
Before you enter your online password, we ask that you verify your personalized security image. This image would be one that you selected during the creation of your web account. Once the image you have selected is displayed, you can be confident that you are accessing our website, as opposed to a fake site that may be attempting to “phish” for your personal information. If you ever log in and do not see the image you’ve selected or the image is incorrect, STOP, do not input your password. Please immediately report this to your plan’s customer service team.
When To Start Saving For College
The old adage about the best time to start something being yesterday holds true when it comes to saving for college. You should start saving for college as soon as you can. The longer you let your savings stay invested, the more time it will have to compound. Many parents start saving as soon as a child is born and some may start saving even earlier than that.
A parent, grandparent, guardian or really anybody else who wishes to fund to that childs future educational expenses should start, in my opinion, right away if not when theyre born, says Joseph Voellm, a certified financial fiduciary at JL Smith Group in Avon, Ohio. This would allow the money to grow and compound over time to meet that future.
Deacon Hayes, a personal finance speaker and podcaster, advises parents to tell loved ones about their college savings plans. If you have a birthday party for your kid, one thing you could do is ask for money towards your kids college instead of gifts. You could do this by using an app where you would share a link for contributions or simply ask for cash.
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Custodial Accounts Under Ugma/utma
- Money saved in a custodial account can be spent on anything cars, airline tickets, computers, etc, as long as the funds are used for the benefit of the minor.
- There is no limit as to how much you can invest.
- The value of the account is removed from donors gross estate.
- Earnings and gains are taxed to the minor and subject to the kiddie tax unearned income over $2,100 for certain children through age 23 is taxed at the marginal rate applicable to trusts and estates .
- The student will gain rights to the account once he or she reached legal age, and can use they money at their own discretion.
- Custodial accounts are counted as a student asset on the FAFSA, which means they can reduce a students aid package by 20% of the account value.
- U.S. savings bonds are federal tax-deferred and state tax-free.
- Series EE and I bonds purchased after 1989 may be redeemed federally tax-free for qualifying higher education expenses.
- Bond owners are investing in interest-earnings bonds backed by the full faith and credit of the U.S. government.
- The maximum investment allowed is $10,000 per year, per owner, per type of bond.
- The interest exclusion phases out for incomes between $117,250 and $147,250 for married couples filing jointly or $78,150 and $93,150 for individuals.
- If bond proceeds are not spent on tuition and fees, interest earned will be included in federal income and subject to tax.