You’ve probably heard us say over and over again how important it is to understand your priorities in financial planning …
If you’re saving for a child or grandchild’s college education, brace yourself. The annual cost at the typical private university now exceeds $38,000, and the annual cost at the typical public college is greater than $17,000.1 Multiply those figures by four, and you might wonder if it’s worth it to send Junior to college. In most cases, the answer is yes. Fortunately, there are ways to make your college savings work harder for you.
Developing Your Plan
The hefty price tag of a college education means families need any help they can get when saving and investing for this important financial goal. Consider 529 College Savings Plans. These increasingly popular plans allow you to invest in professionally managed portfolios of stocks, bonds, and other securities.
Most plans let you invest in portfolios that are based on a child’s age. As the child ages, the portfolio’s mix of securities changes. Some plans also let you choose individual mutual funds and assemble your own portfolio. The best part? Earnings can accumulate without taxes, and distributions are currently tax free if used to pay for qualified higher education expenses.2 Many plans have lifetime contribution limits of more than $200,000 – an important consideration given the pace at which college costs are rising. And you, as account owner, control withdrawals.
Another factor for some families: There are no income limits for contributors. And if your designated beneficiary chooses not to attend college, you may be able to transfer the accumulated contributions to the beneficiary’s sibling, first cousin, or other qualified, college-bound family member – even yourself. Contributions, which are treated as gifts for estate and gift tax purposes, qualify for the $14,000 annual gift tax exclusion ($28,000 per married couple) for each beneficiary. If you prefer, you may make a lump-sum contribution of $70,000 ($140,000 per couple) in the first year of a five-year period without owing federal gift taxes. If you choose this approach, you can’t make additional tax-free contributions to the same beneficiary in the following four years.3
The main point? Begin investing as soon and as much as possible. If you later decide to use a different savings vehicle, rules may allow penalty-free transfer of assets.
^1^Source: The College Board, October 2012. Cost includes tuition, fees, and room and board.
^2^Nonqualified withdrawals are subject to regular income taxes and a 10% penalty. State tax rules vary.
^3^If the contributor dies before the end of the five-year period, the portion of the contribution allottable to the remaining years would be included in his/her gross estate.