Where to Save for College? Part 2

Putting money in a piggy bank529 Plan, Stocks , Mutual Funds, UTMA, UGMA, Coverdell, Roth IRA, Cash Value Life Insurance… How do you decide which savings plan or combination of plans are right for you?

There are many components that should be considered in the decision of where to save your valuable college funds. In “Where to Save For College? Part 1”, we discussed how to calculate how much you’ll need to save and the basic (yet key) factors to keep in mind when taking into account different college savings plans.

Most commonly, I hear parents worried about taxation when deciding on their specific savings strategy. Taxation can be a big deal in a good way and a bad way. As an example, 529 Plans have the tax advantage that earnings are not taxed if the money is withdrawn for a qualified education expense. That’s the good taxation. The bad taxation arises if you need some of that money for a non-qualified education expense or if your student decides that higher education is not for them. In either case, you’d have to pay the tax plus a 10% penalty to get access to the money.

Another frequently discussed feature is whether the college money should be in the parent’s name or the child’s name (UGMA or UTMA). The tax decision will depend on the child versus parent’s tax rate, when the money will be accessed and the kiddie tax rules. The other central feature that parents sometimes forget is access to that money. It is essentially the child’s asset and they gain control of it at age 18.

The Roth IRA’s taxation rules allow money to be taxed when earned, but not taxed during accumulation or withdrawal (subject to some limitations). Roth IRA limits contributions and these limits are dictated by family earned income as well as IRS rules (only $5000 per year for an adult under 50).

One lesser known savings vehicle is to save money is cash value in a permanent life insurance policy.  Savings will accumulate tax deferred and, if the policy is designed correctly, are available to being spent… tax-free!  Contributions can be high and money from the cash value in the policy can be accessed for any need (not only college).

When it comes to college savings and funding, a chief element for many familiesmay be whether the savings are visible or invisible to the financial aid calculation. Every family should assess whether it’s possible that they may qualify for need based financial aid, and if they do, then the financial aid visibility becomes all-important.

To give you a clear visual, the chart below compares different savings plans and the possible benefits of each.

Possible Benefits
Guaranteed Growth Tax Deferred Accumulation Tax Free Use for College High Contribution Limits Investment Choices Transferable (beneficiary) No Income Ceiling for Contribution Access to Money Financial Aid Invisible
529 Plans NO YES YES YES Some Limitations YES YES NO NO
Coverdell NO YES YES NO Some Limitations YES YES NO NO
UTMA / UGMA NO NO NO YES YES NO YES NO NO
Stock / Mutual Funds NO NO NO YES YES YES YES YES NO
ROTH IRA NO YES YES NO YES YES NO Some Limitations YES
Permanent Life Insurance YES YES YES YES Some Limitations YES YES YES YES

When we work with a family to design their college savings plan, it typically will include a combination of these different plans. This allows a family to take advantage of the benefits of each, but lessen the disadvantages. Give us a call to help design your unique college savings plan.

Listen to the April 26th College Smart Radio show to understand the pros and cons of different savings plans, so you can determine which savings plan or combination of savings plans will integrate best with your family’s needs.

This post highlights information discussed during our College Smart Radio “Tackling the Runaway Cost of College” April 26th broadcast where Beatrice Schultz and Mark Guthrie discussed the pros and cons of different college savings plans.  Listen to this broadcast on YouTube here.

Tax advice is not offered by Beatrice Schultz or Westface College Planning. Please consult your tax professional for additional guidance regarding tax related matters.

Photo Credit: Images Money

Where to Save for College? Part 1

Broken Piggy BankWhether you have dreams of sending your newborn child to Harvard, UC Berkeley or San Diego State, you have a lot of savings ahead of you if you plan to foot part of the bill.

You need to come up with a savings plan EARLY – and stick with it for many, many years.

 

Various types of savings plans exist. In fact there are a few specific ones that are commonly adopted by parents to save for college.  Those include:

  • Traditional investment savings accounts.
  • UGMA (uniform guest to a minor’s accounts in their name).
  • UTMA (uniform transfer to a minor’s account in their name).
  • 529 College Savings Plan.
  • Coverdell Education IRAs
  • US Savings Bonds.

But before deciding where to save, the first question most parents ask is “How much do I need to save?”

As an example, let’s calculate how much you need to save for your newborn to afford 4 years at a UC. Today, a UC will run you about $32,000 per year or $130,000 for four years. Tuition cost as well as room and board continually rises about 4-8% per year.  If we assume a 5% inflation, these parents will be faced with a $300,000 to $350,000 college bill when their child reaches 18 years old.

These parents of a newborn would want to stash away $1,000 per month, equaling $12,000 a year (assuming an average 4.5% rate of return over 18 years) to accumulate ~$320,000 to fund that one child’s college education. Wow – that’s a lot of savings and may be overwhelming for many new parents to consider!

So now that we know how much we need to save, the next question is how and where should these funds be saved for the next 18 years?

There are 4 key components that should be considered in the decision of where to save these college funds. Those 4 factors are the savings plan, the investment strategy, having access to your money and the spending plan.

  1. Savings Plan
    1. Should be easy – auto withdrawal.
    2. Flexibility.
    3. Contribution limits.
    4. Outside help – choose a convenient way for family to help.
  2. Investment strategy
    1. Choose your risk and expected return.
    2. How will taxation impact our rate of return (tax now, tax every year, tax later)?
  3. Access to the money
    1. Would you like access to this money during the saving period?
    2. Access if you have an emergency.
    3. Access for a great investment opportunity.
  4. Spending Plan
    1. Spending Plan
      1. Flexibility. Timing.
      2. Do you want to have all your money in a plan that must be used for college funding?

When it comes to college savings and funding, a vital 5th component may be whether the savings are visible or invisible to the financial aid calculation.  Every family should assess whether it is possible that they may qualify for need based financial aid, and if they do, then the 5th component becomes all-important.

Listen to the April 19th College Smart Radio show to start to run the numbers of how much to save and why these 4 or 5 components should be serious considerations for your savings plan.  Listen in to next week’s show to understand the pros and cons of different savings plans, so you can determine which single plan or combination of plans is right for your family.

This post highlights essential information pulled from our College Smart Radio “Tackling the Runaway Cost of College” April 19th broadcast where Beatrice Schultz and Mark Guthrie discussed the factors of where to save for your child’s college fund.  Listen to this broadcast on YouTube here.

Photo Credit: Images of Money

Pay Less for College by Maximizing your Tax Savings

income tax


Although paying for college is expensive, tax breaks are available for university students.

Getting a top-rate education in this country is extremely expensive, and it’s getting worse every year. In order to afford an education, many people rely on saving, and taking advantage of scholarships and other savings programs.

However, there is another way to save for education that’s not always top of mind for parents or students: tax breaks. There are several tax breaks available to make college and continuing education more affordable.  The tax savings you should be thinking about differ whether you’re planning to get an education, receiving it now, or paying for it after.

Tax Savings while Planning for College
The biggest tax saving opportunity before going to college is contributing to a College Savings Plan – called a “529 plan.”  Much like a Roth IRA for your retirement, these plans enable you to put money aside for education. This plan allows you to see your assets grow over time, and not pay any tax on the growth.

Tax Savings During College
There are three major tax breaks available while you’re receiving your education.  The best option for you will depend on your specific situation, but your options are:

Also, one special trick many people don’t know about is the opportunity for the self-employed, folks like freelance designers, real estate agents, or carpenters, to write off education expenses as a business expense if the course relates to their line of work.

Tax Savings After College
There are two big opportunities for recent graduates. They can deduct the interest payments they’ve made on their student loans, and additionally deduct the expense of moving a long distance to start a new job.

One clever strategy can be to ask your new employer to defer your signing bonus, if you’re lucky enough to get one, until the next calendar year.  This is because many tax deductions are income-tested, and that first year out of college is when you’ll be earning the lowest income for the foreseeable future.

This post was provided by Mitch Fox, a Tax Nerd and the Co-Founder of GoodApril, an online tax planning service. GoodApril offers a free “Tax Checkup” to help you identify actions you can take to reduce your taxes. You can follow Mitch on Twitter at @mitchellwfox or @goodapril.

Mitch was a guest on College Smart Radio “Tackling the Runaway Costs of College”  on July 20th, 2013.  Listen to this broadcast on YouTube here.

Upromise – A Cash-Back College Savings Program

Most families will pay for college using a combination of sources.

Most families will pay for college using a combination of sources.

The road to college takes planning, diligence and late nights. On top of all the hard work just to be accepted, college tuition is rising – U.S. student loan debt has passed the $1 trillion mark and is the single largest source of unsecured debt. Despite this fact, fewer families are saving for college, and those who are saving are saving less. According to Sallie Mae’s How America Saves for College report, only half of families are saving, and only one third have a plan.

Aside from loans and scholarships, other possibilities do exist for families with college-minded students. One such option is Upromise by Sallie Mae, a cash-back college savings program through which members have saved nearly $750 million since 2001. Whether you are saving for a child’s college education, paying for a child now in school, or repaying student loans, Upromise enables you to earn cash back for college through everyday purchases.

Free to join and easy to use, Upromise members can earn cash back for college of 5 percent or more at hundreds of major online retailers, such as Target.com, Staples.com and OldNavy.com. Members can double that to 10 percent or more cash-back with the Upromise Mastercard and can also earn by dining out, booking travel and buying gas.

Start saving for college early with baby steps and don’t be intimated by the cost. Consider using a 529 college savings plan and be sure to supplement savings with Upromise.  And friends and relatives can use Upromise to save for any beneficiary they choose.

Upromise by Sallie Mae offers these top five tips for savvy college savings:

  1. Get children invested in their savings and future.  Encourage school-aged children to save money for their own education.   Whether from a weekly allowance, baby-sitting or a summer job, each contribution can add up over time and serve as a reminder of the goal to attend college.  Consider matching kids’ contributions to further encourage their savings.
  2.  Use a dedicated college savings account to save.  529 college savings plans are a tax-advantaged way to save for college. Contributions grow tax-deferred and can be withdrawn tax-free when used to pay for tuition, room and board, books, and fees.
  3. Earn cash for college. Sallie Mae’s Upromise can bolster savings with cash back for college when you make eligible purchases from hundreds of participating companies. Joining Upromise is free and earnings can be invested in a tax-deferred 529 plan, deposited into a Sallie Mae High-Yield Savings Account, used to help pay down an eligible Sallie Mae college loan or you can request a check. Since 2001, Upromise members have earned nearly $750 million toward college.
  4. Check your state for tax incentives for college. Many states provide tax incentives for contributions into 529 plans. Before you choose a plan, consider whether your or your beneficiary’s home state offers any state tax or other benefits that are available for investments in such state’s 529 plans.
  5. Put your savings on cruise control.  Studies consistently show that savers who set up an automated savings plan are more likely to accomplish their savings goals. Automatic savings plans can start with as little as $25 a month.

This blog was provided by Erin Condon, vice president Upromise by Sallie Mae. Erin was a guest on College Smart Radio “Tackling the Runaway Costs of College” on May 18th, 2013.  Listen to this broadcast on YouTube here.

529 Plans & Financial Advisers: Should You Use Them?

There are many valid reasons parents and grandparents decide to open 529 plans through financial advisers even if it’s more expensive.

There are many valid reasons parents decide to open 529 plans through financial advisers even if it’s more expensive.

529 plans are most often the “go-to” savings plan for families to save for college. That’s why we’ve discussed this topic many times on the College Smart Radio show and in our blogs. 529 plans can be complicated and overwhelming for parents to understand. This blog will discuss why you should consider getting a financial adviser to help you choose the right 529 plan for your family.

Many articles you read about 529 plans suggest that you enroll in one “directly” rather than going through an investment broker or financial adviser. The primary reason is that 529 plans purchased through a financial adviser generally are more expensive than their direct-sold counterparts. Buying through a financial advisor may also have you paying a hefty sales charge and the annual costs in advisor-sold 529 plans are typically higher as well. But not everyone is listening to that advice. The most recent data survey by Financial Research Corporation found that more than 50% of all assets in 529 plans at the end of 2009 resided in adviser-sold plans. In fact, the largest adviser-sold 529 plan, Virginia’s College America, is three times larger than the largest direct-sold 529 plan, New York’s. What’s more, three of the five largest 529 savings plans are adviser sold. Continue reading

College Savings Solutions: Charting a Course

Most families will pay for college using a combination of sources.

Most families will pay for college using a combination of sources.

There are many choices to consider when saving for college, but charting a course for college savings solutions is the best first step you can take. Most families will pay for college using a combination of sources, which can include savings, present income, pre-purchase of tuition and other sources such as grants and financial aid, including loans.

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