Saving for your child’s future education costs can be one of the most important decisions for parents. The price of tuition alone is staggering, with new increases each year. Imagine being a new parent and what education costs will be in eighteen years when your child would potentially be in their first semester of higher education. The good news is that there are different options you can implement with strategic financial planning
How retirement planning with a financial advisor can help
Over the past twenty years, tuition costs have doubled, taking into account fees, room, and board. Average costs for educational institutions for 2020 are as follows:
• Private School (nonprofit): $49,879
• Public 4-year institution: $21,950
• Out of State: $38,330
Saving for education can be just as important as saving for retirement. There are many options to help you save for your child’s education and prepare for rising costs. There are qualified tax-advantaged plans geared toward each financial situation, and not all options will be appropriate. A good financial planner can help you sort through the choices and select the strategy that is right for your family.
The 529 prepaid tuition plan
One of the many qualified state tuition plans is the 529 savings plan. There are two kinds of 529 plans, a prepaid tuition plan, and an education savings plan. Both plans would be considered an asset of the parent, which means you have full control of your child’s education savings.
The most significant advantage of prepaid tuition plans is the ability to permanently “lock” tuition at current rates by purchasing college credits. To do this, you must buy the college credits from a state school. So if you are in California, your child could only attend a California State University (CSU) and not a University of California (UC). The funds in the account will appreciate based on the inflation of tuition costs.
If the account holder wishes to close the account, he/she receives only the principal amount they originally paid. The prepaid tuition plan only covers future tuition costs and does not include other associated education costs.
Some disadvantages include:
- Credits appreciate by the rate of inflation. One potential downside to prepaid tuition is anticipating the students’ needs in college.
- The student could receive a scholarship to the university negating the prepaid tuition, which would then be returned interest-free to the account holder.
- The university may also not have the student’s field of study. The prepaid tuition can only be applied on a per university basis, forcing your child to choose a different major.
The 529 education savings plan
The most common 529 savings plan is the education savings plan. The earnings of this plan grow tax-free so long as you apply the funds for qualifying education expenses (e.g. tuition, books, supplies, room, and board). For the earnings to be tax-free, the student must also be enrolled at least half-time. If these requirements are not met, there is a 10% penalty on the earnings.
Anyone can contribute to the plan, regardless of income. Individuals can contribute up to $75,000 a year, and couples who elect gift splitting can contribute up to $150,000. There are no tax consequences associated with these contributions. The plan also allows for annual distributions up to $10,000 to pay for enrollment in elementary or secondary schooling.
In 2019, the SECURE Act allowed for a lifetime aggregate distribution of up to $10,000 to pay for student loans. The SECURE Act also allows for annual qualified distributions for apprenticeships registered and certified with Secretary Labor National Apprenticeship Act also up to $10,000.
Education Planning with Platt Wealth Management
It can feel intimidating, almost impossible, to plan for all of the moving parts within a comprehensive financial plan. Don’t worry — we can help!
If you are searching for a certified financial planner that you can trust to help plan the next stage in your life, please give us a call. At Platt Wealth Management, our financial advisors put your needs first and provide completely transparent services to best prepare you for all financial milestones.
Are you ready to take control of your retirement plans? Give us a call at (619) 255-9554 to set up a complimentary review or email us here.