Investing For College: 5 Things to Think About
One of the most challenging aspects of college isn’t getting accepted – figuring out how to pay for it. So, even before your child selects a major, their college savings plan should be in place and growing.
Therefore, you are perhaps asking yourself: When do you start? What’s the right investment strategy? How should it change over time?
We Cover Five Things You Need to Know:
1. Start Early – A Long Time Horizon Builds Value
The earlier you start, the more your savings can potentially grow. A longer time frame provides access to higher-yielding options if you use a savings account. An investment account is also a great option with a horizon of more than five years before you’ll need to access the funds. Time is your friend because of the concept of compounding interest.
Remember, the average cost of college can range from $10,000-40,000 per yearª, so you’ll need to save more aggressively than you think.
2. Don’t Just Save – 529 Plans Provide Tax and Investment Advantages
529 plans are tax-advantaged savings plans. 529 plans are not just for college – tax-free withdrawals may also include up to $10,000 per year in tuition expenses for K-12 schools. State tax treatment of K-12 withdrawals varies.
Although contributions are not deductible at the federal level, earnings grow federal tax-free, and there is no federal tax on withdrawals to pay for college. Depending on your state, you may be able to deduct contributions from your state taxes.
All 529 plans have a plan manager, usually a financial services firm, that manages the portfolio of investments. In addition, you’ll be able to create a portfolio from an offering of mutual funds and ETFs and tailor it to your time horizon and investment preferences. You and your spouse (and anyone else who wants to – it’s not limited to parents) can contribute up to $16,000 per year each (in 2022) and still fall under the gift tax exemption.
The gift tax exemption rules allow you to bunch up to five years of gift tax exemptions to contribute up to $80,000.
The key to saving is to do it consistently. Figure out your budget, plan the amount you can invest, and have it automatically deducted from each paycheck.
3. Get Your Child Involved: Custodial Accounts Create Commitment
Getting your child involved in the process by setting up a savings or investment account that they can contribute to is a great way to keep them focused on college and teach them some basic financial skills. The Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act (UGMA/UTMA) allow you to create a custodial account in a minor child’s name. An account like this is available at a bank or brokerage firm. The accounts can be used to deposit gifts of cash that the child receives – for instance, birthday or holiday checks from grandparents or other family and friends, and also for the child to save his/her earnings.
4. Shift the Allocation Through the Journey
Similar to shifting your retirement portfolio allocation to be more conservative as you get closer to retirement, your child’s 529 plan allocation should be monitored and reallocated as they progress through high school and the time horizon gets shorter. Again, your financial advisor can help you decide to preserve what you’ve built up and provide for continuing growth.
5. Got a Late Start or Have a Generous Benefactor?
If you are over the gift tax exclusion and the 529 plan isn’t enough, paying tuition directly to the college or university is always an option. This applies to anyone – not just parents, so if grandparents, step-parents, partners, friends, or others who want to help, they can make payments directly, without penalty.
Don’t Limit Your Options
The second most important factor in affording college? Encourage creative thinking in yourself and your child instead of focusing on one school or specialization. College success story: One mom knew her daughter’s deepest desire was to live in NYC. While New York University was out of the budget, she researched schools, and Fashion Institute of Technology was not. Her very not fashion-oriented but analytically-gifted daughter visited the school, realized she could put together an international business degree with a concentration on data – and at graduation, got hired by a financial firm to manage internet analytics.
Like any other goal, such as buying a home or investing for retirement, consistent savings and a solid financial plan can get you there. Your financial advisor can help you deploy the tools you need to get you and your child where you want to go.
Our firm was referenced in an article in the media discussing some of the topics mentioned in this article.
ªThe College Board reports the average cost of four-year colleges for the 2021-22 school year was $10,740 for public schools (in-state) and $38,070 for nonprofit private schools, only including tuition, fees, and room and board.
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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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