College Funding: Proactive Parents are Happier Parents!
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“The College Blueprint: How Much is Needed & How to Achieve It”
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Despite plenty of legitimate grievances towards the unreasonableness of today’s higher education costs, the overwhelming percentage of parents still prefer and insist on college education for their children. Therefore, to ease or ideally to even eliminate this costly endeavor, it is absolutely imperative to start saving for kids’ college as soon as possible.
To put things in perspective, consider that the 2017-18 average cost of college tuition, fees, room & board was $20,770 for an In-State 4 Year Public College, and, a whopping $46,950 for a Private Non-Profit college. So, based on these costs, the total cost of completing a 4-year Public college today will amount to over $83,000, and for a Private college, that amount will be over $188,000!
So, Let the Saving Begin Now!
To meet the high costs of sending your kids to college, we encourage and guide our clients to start a college savings account as early as possible, preferably right at the child’s birth! As in any other investment, time is of the essence, hence, being proactive and early can only help your accumulation goals. For later years, when the child is about 2 years away from entering college, we also guide our clients for the planning of any scholarships, grants, and low interest financial assistances that can provide you with funds.
To accumulate college savings, we offer a variety of financial vehicles, many of them tax advantaged. The following is a brief explanation of each.
529 College Savings Plan: It was originally created by the Congress in 1996 as a part of the Small Business Job Protection Act. However, it was not until 2001 that the plan really started to take off in popularity via financial companies’ mass marketing efforts. 529 plans are created specifically for the purpose of saving for college, and most mutual fund companies offer them. The owner of a 529 account who is typically a parent has the full control of the plan such as the ability to select investment types, changing beneficiaries, and controlling distributions. The potential growth inside a 529 plan is tax free, and any distributions from the plan are also tax free, as long as they are spent on education related items such as tuitions, fees, room & board, stationary, computers, and even student car expenses. Unlike IRAs, there are neither income limits nor contribution limits for 529 plans, however, $15,000 per year is the limit for a single contributing individual ($30,000 for married couple) to contribute to the plan without any gift-tax consequences. A 529 plan can be established for anyone- child, grandchild, spouse, or even for oneself.
As far as investment styles are concerned, there is not a set way of an approach, but generally speaking if a 529 account is opened at a child’s birth, the account owners/parents tends to typically be more “aggressive” during the first seven years of the child’s life in order to theoretically take advantage of an above the average growth potential. Starting age 8, the investment approach tends to shift towards becoming more “moderate”, and it remains that way until the child becomes 15. After age 15, it might be appropriate to obtain a “conservative” portfolio in order to minimize the risk of a loss in case of a sudden market decline.
How Do 529 Assets Affect Financial Aid? A major disadvantage of a 529 Plan is that it directly affects a student’s eligibility for receiving either Cal-Grant or Federal Pell-Grant, because, a 529 plan is considered a student’s contributing asset. 529 assets that are owned by the parent or the student are counted at a 5.64% rate when determining financial aid eligibility. Qualified distributions from a parent- or student-owned 529 are ignored, meaning they do not count as income for expected family contribution purposes.
Maximum Funded Index Universal Life Insurance (IUL)- Another strong and viable way of saving for college. The funds in such policies accumulate and are distributed without any tax consequences when the distribution is done through a properly designed policy loan regiment. A supremely valuable feature of an IUL is that it earns market like returns while being protected against any market loss (Learn about Index UL). However, it should be noted that an IUL is a long-term financial vehicle, so, to maximize its’ benefits, a minimum window of 12 years should be allowed. Unlike 529 Plans, the cash value in a life insurance does not affect a student’s eligibility to receive financial aid if the student is not the policy owner. Another major advantage of saving for college via life insurance is its’ protective aspect in case a parent dies prematurely.
Roth IRA: This is also a tax-advantaged option to save for college. For 2020, a total of $6,000 a year ($7,000 for over age 50 folks) can be contributed to a Roth IRA. The monies in a Roth generally gets invested in a variety of mutual funds that the account owner can select. When using Roth IRA for the purposes of qualified education expenses, the 10% early withdrawal penalty for people under the age of 59 ½ is waived. However, the earnings portion of the account will still be taxable at the owner’s income tax rate. On the other hand, the contribution portion of the account is always tax free, because the taxes have already been paid on the contribution portion since Roth IRA is not tax deductible.Municipal Bonds: It’s an alternative way of saving for college; one that avoids taxes entirely and is also a safer bet in comparison to growth oriented mutual funds. The earnings of Municipal Bonds may be low due to the nature of the investment, but if started early and contributed regularly, they have the potential to accumulate enough for college. Munis are also considered to be a rather smart investment as they are not restricted to only college spending, but for any purpose that the account owner might deem necessary. Another important aspect is that the ownership of a muni account is typically under a parent, resulting in complete parental control of the distributions, and, the avoidance of lowering a child’s chances of getting grants.