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It's THAT Time of Year...
Back to school time, I had a school bus sighting this morning. Sorry kids. Typically parents smile, kids of all ages groan. I remember getting those butterflies in the deepest pit of my stomach- wondering how my teacher would be, will I remember my multiplication facts, when lunch was and most importantly who would be on recess with me? It always worked out and I developed a life-long love for learning. I am grateful to all the teachers and my parents for this.
I hope it has been a great summer break for your family.
We all agree education is invaluable and college prepares most of us for a career. I think we also all agree that education is not cheap and is continuing to rise. The typical increase year over year for tuition, room and board is 5 to 8%. The average tuition, room and board is $18,400; this breaks down at $13,600 for in state public and $36,300 for private institutions (For those of you who want numbers here are my rough calculations: using the lower end of the average Inflation at 5% and current average cost $18,400; in 18 years the cost will be $44,281. Here is why you should save. Hypothetically, saving $200 a month from birth to 18, earning 7% returns will provide $86,647). I hesitate to put numbers in here, for I do not want to daunt you, but it is the reality. I hope college inflation costs come way down and accounts earn well above 7%.
The Necessity
College planning needs to be a part of every family's financial plan. The average family will likely fund school using a combination of 529 savings, student loans, cash on hand and thru student employment. Whether for your children or grandchildren there are ways to prepare now- it is never too late to start. Typically the best way to save money for college is thru the use of 529 college savings plans.
Why a 529 plan?
Tax Advantages There are several benefits.
- Tax-deferred growth.
- Tax-free withdrawals for qualified higher education expenses.
- Many states offer a tax deduction annually, per a beneficiary.
Gifting and Estate Tax Advantages A Valuable tool in Estate Planning
- Accelerating gifting allowed; an individual can contribute up to $70,000 ($140,000 per couple) per beneficiary in a single year without gift tax consequences provided that donor does not gift any more to that beneficiary over the next 5 years.
- Assets are removed from the account owner's estate (If using the five year accelerated gifting, then a prorated amount reverts back to the estate if the account owner dies within five calendar years).
Control and Flexibility Most people don't know these points.
- The account owner has control of the account and contributions.
- There is No income restriction to establish an account.
- Assets if unused can be transferred from one beneficiary child to another child/family member.
- The account owner, which is typically a parent, is considered the owner of the account for financial aid purposes which is more favorable than the asset being considered the child's. When owned by grandparents none of the assets are included.
- If the beneficiary earns a scholarship, the account owner may withdraw an amount equal to the amount of the scholarship without penalty. If a beneficiary becomes disabled or dies, the entire account may be withdrawn without penalty (In all cases, the earnings withdrawn will be taxable at the recipient's tax rate and there is no penalty).
- The money may be used at any eligible educational institution in the U.S. and many schools abroad qualify as well.
To read more about 529 College Plans, Click Here.
How I can help
Educational planning is another vital piece in a family's financial planning strategy. It has to be balanced with your retirement savings (so you don't ignore appropriately saving for your own retirement- otherwise, the kids will be taking care of you), your current tuition needs if you children are in private K-12 and systematic so you grow into the habit of saving now. It can be a huge blessing to your children or grandchildren, while also providing some great tax and estate benefits.
I routinely perform education needs analysis for clients and those introduced to me.
Let me know how I can help.
Now back to the books kids.
Sign up HERE to receive Stewardship Cents Newsletter Non-qualified withdrawals or withdrawals in excess of qualified expenses may be subject to an early withdrawal penalty of 10% in addition to a tax withholding. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer's official statement and should be read carefully before investing. Favorable state tax treatment for investing in Section 529 college savings plans may be limited to investments made in plans offered by your home state. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.
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