Do you want to help your kids save for college? You’re not alone. According to Fidelity Investment’s 10th Annual College Savings Indicator Study, almost 70% of parents intend to cover any tuition costs their kids accrue in full. But only 29% of parents are on track to reach that goal.
College is insanely expensive. The average cost for an in-state public college for the 2017-2018 school year was $25,290. The average 2017-2018 annual cost for a private college is almost double at $50,900. The cost of college has grown so much in the past several years, and the student loans that many people take out to cover the cost of a college education are threatening to put the next several generations into a debt spiral.
Knowing this, it makes sense that as a parent or grandparent, you want to help the children of your family pay for college in full and start their post-college lives on good financial footing. But what’s the best way to save for their college education?
529 plans are a tax efficient way to save for your children’s college education costs. Anybody can contribute to them, which makes them a great way for parents, grandparents, and other family members to help the next generation through school. 529 plans are set up to be used exclusively for qualifying education costs. In the past, they’ve been largely dedicated to college savings, but the new tax code has freed them up to also be used for primary and secondary private school costs - which is a benefit for families who are facing this additional education expense.
A 529 plan is funded with after-tax money, but grows tax-free. This means that any return you gain on investments in your 529 account aren’t taxed, and any withdrawals for educational purposes aren’t taxed, either. This can be an excellent way to grow your contributions from the time your kids are young.
Roth IRAsAlthough a 529 plan is a more traditional college savings route to take, you have other options. One of those options is a Roth IRA. Although people usually see Roth IRAs as a retirement savings vehicle, they can also be used to cover education costs. Like a 529 plan, Roth IRAs are funded with after-tax dollars. Their withdrawals are also tax and penalty free so long as your funds have been growing for five years since your original Roth contribution.
Roth IRAs pack an additional punch due to their flexibility. While 529 plans have to be used for education-related expenses, a Roth IRA can also be used as a house down payment or as part of your retirement savings. This means that even if your child decides that college isn’t a fit for them, or you over-save, you can still access your funds tax and penalty free.
Move Forward With a Plan
Having a college savings plan might seem intimidating when you look at big-picture savings goals, but if you start early and break up your goals into mini-milestones, they become much more achievable. No matter what savings strategy you commit to, make sure that it fits into your overall financial plan.
Not sure what strategy works best for you? I can’t blame you. Saving for college can be headache-inducing. Contact me today; I’d love to help you talk through your options.
Tony Velasquez is the Founder and Managing Director of Wisely Advised an Illinois Registered Investment Advisor. Wisely Advised provides comprehensive financial planning and investment advisory services to both individual and business clients. You can learn more about Tony and his firm here.
Tony Velasquez runs Wisely Advised, LLC a full-service Registered Investment Advisory Firm offering comprehensive financial planning and investment advisory services to individuals, families, and businesses.
Whether it's traveling, being at the beach, or at his family's ranch in Texas, Tony loves enjoying time with his family and friends.