As another school year begins, we are also getting closer to that day when we’ll drop off our children at college. A lot of emotion comes with this change, and one heartache is, “How are we going to pay for all this?” The answer is, “With college planning.” If you have a moment, log onto our website and visit the college video on our home page at www.iwealth4me.com.
It’s hard to argue against the idea that children need some type of formal training after high school to prepare them for future careers. They may start with only one year of schooling, but if they have training behind them, they will have a better chance of finding a job — and securing a higher-paying one. Certainly we have many options when it comes to planning for the cost of secondary education.
One option is to open an account at a local bank or investment company where you will be the custodian over the account until your child meets the age of majority, which varies from state to state. These accounts are mostly Uniform Transfers or Gifts to Minors (UTMA or UGMA) accounts, and the tax ID number on the account is that of your child’s. The advantage is that the funds are not in your name for tax purposes. The funds within the account are your child’s, no matter who puts the money into it. A couple of disadvantages with these types of accounts would include no tax deferral option and no changes to the beneficiary.
Another option is to set up a 529 college savings plan. Typically 529s are set up through investment companies and are easy to invest into. Some will allow you to start a plan for as little as $15 per month. The advantages with the 529 plan are numerous and include tax deferral of your money while it’s in the account, which comes out tax free (like a Roth IRA) if used for qualified college expenses. Grandparents like them because they can shift the college money out of their estate. The drawbacks are that if you use the money for something other than college, you will be taxed on the earnings and will need to pay a 10 percent penalty on them. These 529s have been a preferred college savings method since the state-sponsored plans were introduced.
Over the past 18 years of working with clients, I’ve seen just about everything when it comes to college planning. Some parents don’t want to save anything for their children’s college costs. They believe that if their children pay for their education they will better understand its value. I’ve also had clients pay 100 percent of college expenses for their children. I think a lot of it comes back to parenting and helping children get over the hurdles as they come.
The majority of my clients have been in between these two extremes. They want to help their children with college expenses but quite frankly can’t cover the full load or might not want to. They can’t sacrifice their own retirement for their children’s college education. It’s just the financial reality, especially with tuition continually rising faster than inflation and the hit that many people’s retirement funds took a few years ago.
Whether you are currently saving for college or not, whether you are a grandparent or parent, it’s important to think through your strategy and become informed. At iWealth we believe in education, both for the benefit of our clients’ decision-making and their children’s future, and that is why we are hosting an event co-sponsored with First National Bank on September 27 at 7 p.m. at the University of Minnesota Southern Research and Outreach Center. This event will feature speakers from Bethany Lutheran College and John Hancock. We will be discussing these topics in more detail as well as how to prepare your high school child to get into college. If you or anyone you know might be interested, it is a complimentary seminar that is open to the public. Please inquire at iWealth to be added to the event.
A four-year college degree is not for everyone; however, secondary education makes sense for most of us. Along with that education comes the cost of it. Get informed, review your plan and stay focused on your goals.
Brad Connors, CWS®
Investors should consider carefully the investment objectives, risks, charges, and expenses of the municipal fund before investing. This, as well as other important information, is contained in the official statement. Please read it carefully before investing or sending money.
An investor’s home state may offer favorable tax treatment only for investing in a plan offered by such state. Consult your tax advisor regarding state and federal tax consequences of the investment.
Participation in a 529 Plan does not guarantee that the contributions and investment return will be sufficient to cover future higher education expenses. Investments involve risk and you may incur a profit or loss.
A plan offering, which contains more complete information, is available by contacting Brad Connors.