College Planning – It’s Never too Early to Begin
One of the greatest investments you can make is in your children’s education. A high quality education can be essential in helping your child get off to a successful start in their career.
When preparing to save for your children’s education there are several things to consider.
- What are you and your child’s education goals?
- What is the time horizon to begin paying for school?
- Will you use the money to pay for K – 12 schooling or for post-secondary education expenses?
- How much do you wish to pay for your child and how much will they be accountable for?
- Will extended family contribute to the savings plan?
Given today’s high cost of education, including private elementary, high school and college, establishing a plan is essential for long term success. Without a plan you may find it difficult to save for both education goals and for your future retirement plans. A strong plan will allow you to provide for your children’s education without jeopardizing your own retirement goals.
In terms of college education cost, in 2017 the average tuition and fees for an Ohio university was $10,510* adding room and board and miscellaneous expenses can easily double this amount. College costs are increasing each year at an average of 3.2% above the increase in inflation.* If you choose to send your child to a private elementary or high school you may also be faced with the reality of high costs for longer than four years. By starting your savings when your children are young you can allow the money to grow over several years and potentially use the money tax-free for their educational expenses.
Other family members and even friends can participate in saving to help with the education plan for your child. The most common savings vehicles used are 529 plans, Roth IRA, and an UTMA account. Additionally, your child may qualify for grants, scholarships or loans to help cover the cost. Savings methods are in your control now, while other federal and school aid programs come into play when they apply to school.
Here is a brief comparison of these savings options:
| 529 Savings Plan | Roth IRA | UTMA | |
| Income Limits | No | Yes | No |
| Max Yearly contribution | 15,000 per giver; $30,000 for a married couple without tapping into lifetime gift tax exclusion | $5,500 in total- after-tax; $6,500 if over age 50 | 15,000 per giver; $30,000 for a married couple without tapping into lifetime gift tax exclusion |
| Account Earnings | tax-deferred growth | tax-deferred growth | tax-deferred growth |
| Qualified use of funds | K-12 and college education expenses | Education, home purchase, >5 years open and > 59.5 years of age | K-12 and college education expenses, as well as savings account for child |
| Taxes on qualified distributions | Tax-free if for a qualified expense. Education savings account only. Taxed if not used for education | If not used for education then savings can be switched to be used for retirement | Since this is both an education savings account and savings account for a child there are taxable withdrawals |
The recent tax law changes under the Tax Cut and Jobs Act of 2017 added to the benefits of a 529 plan. These changes include:
- 529 plans can now be used to pay for qualified expenses at K – 12th grade schools in addition to the college, trade school and community colleges originally allowed under the program.
- Each person contributing to the plan can deposit up to $15,000 per year in a 529 account and up to $30,000 for a married couple
- If you receive an inheritance you can contribute up to $75,000 during the year or up to $150,000 for a married couple
- There is a $4,000 state tax deduction for contributing to a 529 account (pertains to Ohio law and may vary by state)
- If more than one person donates to the 529 plan during a tax year each party is eligible for the $4,000 state tax deduction.
- Qualifying education expenses include;
- Tuition, fees, room and board, laptops and supplies. Other expenses may be permitted but check with your tax professional for tax advice
- You can withdraw up to $10,000 per year to pay for K – 12th grade educational expenses and up to the actual expenses incurred for post-secondary expenses
If your child does not use these funds for education the balance in a 529 account can be transferred to a sibling, niece, nephew or other relative. Any funds withdrawn from a 529 account that are not used for qualified educational expenses will be taxed at the federal and state level.
Roth IRA’s are an alternative tool if you are unsure if your child will attend any schooling beyond high school. If you end up not using the money in the Roth IRA for educational expenses the funds can remain in the account to be used to help fund your retirement. This account has a much lower contribution limit, but can be a good hedge if you are unsure of your child attending post-secondary schooling.
Another savings vehicle for education is an UMTA account. An UTMA is a savings account that parents create specifically for their child. These accounts are unique and can be funded for education savings or other savings for your child. Since the funds can be used for spending other than education there is no tax deduction and no tax free withdrawal on these accounts.
There is no one size fits all education plan, so building a customized approach is best. Proper planning can ensure you fund education and retirement without your goals interfering with each other.
Proper planning can also have tax advantages for you in saving for your child’s education. For example, when you begin withdrawing money from a 529 Plan you may enjoy the tax free benefits of the account.
Planning for education goals and expenses is a journey. HFS can help you develop the goals and create a customized plan. You have the ability to help shape your children’s future so why wait to start planning?
*Source: The College Board: Trends in Higher Education
Written by: Justin Hamlin, Associate Client Advisor
These are the opinions of Justin Hamlin and not necessarily those of Cambridge, are for information purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. The strategies discussed herein are not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. However, prior to opening an account, Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model. You are also provided the opportunity to place reasonable restrictions on the securities held in your account.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors. Before investing in any state’s 529 plan, investors should consult a tax advisor. If withdrawals from 529 plans are used for purposes other than qualified education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.