Save today for tomorrow’s college bills
Another school year is drawing to a close. If you have young children, you might be planning for their summer activities. But you also might want to look even farther into the future — to the day when your kids say “goodbye” to their local schools and “hello” to their college dormitories. When that day arrives, will you be financially prepared to pay for the high costs of higher education?
Consider this: For the 2013–2014 academic year, the average cost (tuition, fees, room and board) was $18,391 for an in-state student at a four-year public college or university, and $40,917 for a private school, according to the College Board. And these costs may well be considerably higher by the time your children enter college.
Of course, these are just the “sticker” prices; some families pay less, thanks to grants and tax benefits, such as the American Opportunity Tax Credit and the Lifetime Learning Tax Credit. Still, you may encounter some hefty college bills down the road.
But college is still a good investment in your child’s future. Over an adult’s working life, an individual with a bachelor’s degree can expect to earn, on average, nearly $1 million more than someone with only a high school diploma, according to the U.S. Census Bureau. So you’re saving for a good cause.
Unfortunately, you may not be saving enough — or you might not be making the most of your savings. To save for college, more parents use a general savings account than any other method, according to Sallie Mae’s How America Saves for College 2014 study. These types of accounts carry two significant drawbacks: They typically earn tiny returns and they offer no tax advantages.
However, you do you have some attractive college-funding vehicles available, one of which is a 529 plan. Your 529 plan earnings accumulate tax free, provided they are used for qualified higher education expenses. (529 plan distributions not used for qualified expenses may be subject to federal and state income tax and a 10% IRS penalty.) Furthermore, your 529 plan contributions may be deductible from your state taxes. But 529 plans vary, so be sure to check with your tax advisor regarding deductibility.
A 529 plan offers other benefits, too. For one thing, the lifetime contribution limits for 529 plans are quite generous; while these limits vary by state, some plans allow contributions well in excess of $200,000. And a 529 plan is flexible: If your child decides against college or vocational school, you can transfer the unused funds to another family member, tax and penalty free.
While a 529 plan is a popular choice for college savings, it is not the only option available. You also might want to consider a Coverdell Education Savings Account, which, like a 529 plan, can generate tax-free earnings if the money is used for higher education expenses. You can typically only put in a maximum of $2,000 per year to a Coverdell account, but it does offer more flexibility in investment choices than a 529 plan.
Your children may be young today, but, before you know it, they’ll be packing their bags for college. So, no matter which college savings vehicles you choose, put them to work soon.
Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway.