We asked two local financial advisers to give us all of the necessary details on how to create an education savings plan that actually works for your family.
There’s no getting around it: College is expensive.
There’s tuition (in state and out of state), room and board, textbooks, additional fees … you get the point. For some local residents who have children enrolled in private school, paying out of pocket for these costs won’t come as a surprise, but for those helping their soon-to-be adult children make the transition into college life from public school, this could be one of the biggest financial endeavors you face as a family.
With the start of a new year and (potentially) the need for a new family budget, we spoke with two local financial advisers about everything you need to know in order to start saving for your child’s education—the right way.
Travis Russell, CFP, is a principal and client adviser from Glassman Wealth Services, and Brett Bernstein is the CEO and co-founder of XML Financial Group. Both have shared their knowledge and experience in the highlights below.
First things first, what options do readers have in terms of saving for college?
TR: The two most common savings options for children are the college 529 savings plans and the Uniform Transfers to Minor Act (UTMA) accounts.
The Virginia 529 college savings plan is the more popular option, and generally the type of account we recommend individuals use for college savings. While individuals from any state can open a Virginia 529 account, the owner must be a Virginia resident to receive a tax deduction. Individuals can receive a Virginia state tax deduction equal to the lesser of their contribution or $4,000 per account. Individuals over 70 can receive an unlimited state tax deduction based on their contributions, which can be a great savings opportunity for grandparents. Additionally, the growth on the assets within the account is withdrawn tax-free if the assets are used for qualified education expenses.
On the other hand, UTMA accounts are taxable accounts, meaning annual dividends and interest are subject to tax, and the assets within the account must be distributed to the child upon reaching age 21 in most states. Many parents are not comfortable with 21-year-old children having complete control of the money, and we see that as the primary drawback for these types of accounts. The benefit of the UTMA account is additional flexibility to use the money for purposes other than education.
BB: Another way is prepaid, for example at the University of Maryland, where you pay for the education up front and in advance. But we tend to avoid suggesting those because, long story short, a lot of the prepaid plans don’t have to give you as much money as the plan earns. The nice thing about it is you know your child is going to go to the state school, but that doesn’t mean the investment was worth it in the long run.
Out of all of the college savings options, which do you find to be the most effective?
TR: The 529 account is likely the best savings option for individuals in Virginia. Virginia 529 options can be opened online or through American Funds with the help of a financial adviser. Both platforms provide extensive investment options, and, if utilizing American Funds, we recommend utilizing the lowest cost share class available. The account can be used to fund all qualified educational expenses for college—both undergraduate and graduate programs. Additionally, 529s can now be used to fund tuition costs for private K through 12th grade educational programs, up to $10,000 per child per year.
BB: The Virginia 529 plan for college and other educational expenses is the best one.
Other than simply having money set aside for your children to go to college, what are the benefits of saving money for tuition and fees in the future?
TR: The real benefit of saving for your children while they’re young is the potential tax-free growth within a 529 account. As the kids grow older and college grows closer, there is less time for the assets to grow, so it’s important to save early. The compound growth can be significant if saving starts at a young age.
BB: The power of compounding is invaluable. When kids get into the college years, it’s sometimes the biggest expenditure years for parents, especially if you have multiple kids. And with the cost of schools now, you could have a $40,000, $50,000 or even $80,0000 tuition per year. Parents could have to refinance their homes, take out an equity line or put the child into debt. But if you start early and do your planning, you could avoid that. The first question I always ask is, “What’s your goal?” If someone would rather have retirement goals and do what they can afford to do, that’s fine. Or maybe they do what they can do to make sure their child has no debt, that works too.
What should readers know about setting themselves up to save, even if it’s not thousands of dollars each year?
TR: Like most savings strategies, there is nothing wrong with starting small and gradually increasing the savings amount. Starting with $50 or $100 per month adds up over time.
BB: Nothing’s too small, the power of compounding is very powerful, and every situation is different. It’s about doing the best that you can for savings. Most people are never going to be able to put away enough to cover it all (tuition, room and board, expenses, etc.). When we do planning, I show parents the numbers. A lot of parents will estimate their child’s college costs and say, “Let’s say $50,000.” In today’s dollars (and with tuition increases in the future), the plan will show you that you would probably need to be saving $1,500 to $2,000 a month. Most people can’t do that, but if you take the approach of doing the best that you can and then supplement (with loans, cash at-hand, etc.) when the time comes, at least you’re not coming in empty-handed.
Lastly, what is the best way to start talking to your children about the financial responsibility of college?
TR: Whether it’s college savings or finances in general, early conversations about savings, investments, budgeting and more can be extremely impactful as the kids become young adults. Opening up Roth IRA accounts with earnings from high school jobs, using websites like Mint to track spending, teaching kids about philanthropy or even adding them as an authorized credit card user to teach them about credit can be great lessons prior to heading off to college.
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