Did you know the average cost of a four-year college education today can exceed $60,000—and that’s just for in-state tuition? That’s not including rent, books, tutoring, and other essential needs.
And on top of that, you also have to juggle other financial priorities like retirement, healthcare, and daily living expenses. It adds up quickly…
And while recent research has shown that the cost of college may be decreasing or, at the very least, are stabilizing – it’s still a major expense that families need to be preparing for.
But here’s the good news: with a clear plan and the right tools, you can navigate this challenge and ensure your family’s future is bright. Whether you’re a parent preparing for a newborn’s future or a grandparent hoping to leave a lasting legacy, we’re here to guide you through the options and strategies to save effectively for education.
The Best Time To Start Saving? Yesterday.
The cost of a college education is astronomical, and it will only get worse. Education expenses have been climbing at an average rate of 5% annually.
Saving early is your secret weapon. By contributing small amounts consistently, you can harness the power of compounding—the phenomenon where your earnings generate even more earnings. Imagine this: contributing $200 monthly to a 529 plan from your child’s birth could grow to over $65,000 by the time they turn 18, assuming a 6% return. That’s the magic of starting now.
Planning ahead gives you more choices and less stress. You’ll have the freedom to explore various funding strategies and ensure you’re prepared for whatever educational path your child or grandchild may choose.
Popular Savings Options to Consider
There are 4 primary savings vehicles to consider: 529 plans, Custodial Accounts, Coverdell Education Savings Accounts, and Roth IRAs. Let’s break down the pros and cons of each.
#1: 529 Plans
529 plans are a favorite for good reason. These tax-advantaged accounts are designed specifically for education expenses,
- Pros: Contributions grow tax-free, withdrawals for qualified expenses are untaxed, there are high contribution limits, you can transfer funds between family members, and while plans vary state-by-state, you can contribute to any state’s 529 plan.
- Cons: Contributions must be used for education expenses and fees vary per state.
#2: Custodial Accounts
These accounts allow you to save for a child’s future needs, including education. While they offer flexibility, there are trade-offs:
- Pros: Funds are not restricted to education expenses only, there are no contribution limits, and no withdrawal penalties.
- Cons: Assets belong to the child upon reaching adulthood, which could affect financial aid eligibility, and any deposits made to the account cannot be changed or reversed.
#3: Coverdell Education Savings Accounts (ESA)
A lesser-known but effective option, Coverdell ESAs offer tax advantages for qualified education expenses:
- Pros: Tax-free growth, withdrawals can be used for elementary and secondary school expenses, and you can change the beneficiary without penalty.
- Cons: Contributions are limited to $2,000 per year, contributions aren’t allowed after that beneficiary turns 18, the account must be closed by the time the beneficiary reaches 30, and your ability to contribute depends on your income.
#4: Roth IRAs for Education
Roth IRA? Isn’t that for retirement? Generally speaking, yes, but Roth IRAs can be a creative solution for education savings. You can withdraw contributions—but not earnings—penalty-free for qualified education expenses. Keep in mind:
- Pros: Withdrawals for qualified education expenses are tax-free, Roth IRA balance has no impact on financial aid, and funds can be used for retirement if not needed for education.
- Cons: Contributions are limited to $7,000 per year, and using Roth funds for education may impact your long-term retirement goals.
Which Savings Option Should You Choose?
When deciding how to save, consider these important factors:
- Flexibility of Funds: Can the savings be used for various educational purposes?
- Tax Benefits: Which option provides the most advantageous tax savings?
- Financial Aid Impact: How does each account affect scholarships and financial aid eligibility?
- Control: Who manages the funds and decides how they’re used?
The Role of Grandparents in Education Savings
The gift of education is more valuable than any toy. Every monetary contribution counts, so grandparents can play a significant role in securing their grandchildren’s future. Here’s how:
- Unique Contribution Opportunities: Gifting to an established 529 plan, setting up their own 529 plan, or directly paying for tuition can help without affecting gift tax limits.
- Financial Aid Advantages: Direct tuition payments made by grandparents don’t count as income for financial aid purposes.
- Family Legacy: Education savings are a meaningful way to invest in future generations, leaving a lasting impact.
What’s Next?
It’s time to take action! Here’s how to get started:
- Estimate Costs: Use online calculators to project future education expenses.
- Set Goals: Discuss savings objectives with your family.
- Seek Guidance: Work with a financial planner to create a personalized education savings strategy.
Your child’s future is worth every penny. Let’s make it a reality together. Contact us today to explore your options and create a plan tailored to your needs.