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Education Planning: Tips for Smart Saving

Education Planning: Tips for Smart Saving

May 16, 2024

Welcoming a child and growing your family is an exciting phase of life. However, as parents and caregivers know, raising children comes with many expenses. One future expense that tends to rise to the list of priorities (and sometimes, stressors) is the cost of college education.

Saving a large yet still unknown amount of money can be daunting. With rising tuition costs and the ever-increasing importance of a college degree, it's essential to start planning early. In this month’s post, I'll share some actionable saving strategies and education planning tips to help you prepare for your child's future. 

Start Early

The earlier you start saving for your child's education, the better. Compound interest works wonders over time, so the sooner you begin setting money aside, the more it will grow.

It is advisable to start small, even if that is depositing $50.00 a month into a college savings or similar account. You'll be surprised how things can add up over time and how interest and growth can help you work toward the amount your child may need. You can always adjust as your income grows or as childcare, baby supplies, and other related expenses phase out as your children get older and as the timeline for when you’ll need the funds progresses.

Choose Your Savings Vehicle

There are a few options and types of accounts that can help you pursue your education planning goals. Each has benefits and limitations, so here is an overview of each.

  1. 529 Plans: These tax-advantaged savings plans are popular and designed to encourage saving for future education costs. Known commonly in Louisiana as the START Saving Program, 529s allow you to put money away for a beneficiary (your child or grandchild) and use that money tax-free to pay for educational expenses.

Something to note about 529s is that they recently underwent some changes when it comes to how the funds can be used. Previously, any withdrawals not used for educational expenses were subject to federal income tax plus an additional 10% penalty on earnings. As of the start of 2024, however, unused funds from a 529 plan can be rolled over into a Roth IRA account tax-free1. Many of my clients over the years expressed concern about locking funds into a 529 if their child chose not to attend college, so this allows for more flexibility than in previous years. Here is a great video with a summary of the 529 changes.

  1. Roth IRAs: Roth IRAs offer tax advantages for retirement savings and can also serve as educational savings vehicles. Contributions are made with post-tax dollars, and qualified educational expense withdrawals are tax-free. Contribution limits apply, with individuals under 50 limited to $6,000 annually and $7,500 if you’re over 502.

One advantage is that Roth IRAs are not limited to educational expenses. So, if a child receives a scholarship or chooses not to attend college, the funds are still available for other expenses.

  1. Traditional Savings Accounts: While traditional savings accounts offer flexibility, they provide limited tax benefits compared to other options. Additionally, with the higher flexibility, you risk tapping the accounts for non-college-related expenses, depleting the college fund. While this is undoubtedly an option for saving money for education, we typically recommend other avenues.

Set Realistic Goals

Determine how much you'll need to save for your child's education by researching the costs of tuition, room and board, books, and other expenses. I often help clients understand what they can likely expect to pay depending on when their child will be of age for university or college. Other considerations include whether your child will choose in-state or out-of-state, whether or not they want to attend public or private universities, or if they plan to take any community college or online courses. Setting realistic goals will help you stay on track and save enough to cover future education expenses. Here is a helpful tool that can get you started.

Consider Other Education Paths

Nowadays, college isn't the only path to success. Talk with your child as they near high school graduation about their interests, and research alternative education options such as vocational schools, apprenticeships, or online courses that may be more affordable and offer valuable skills and credentials. With recent changes to the 529 plans mentioned above, sometimes the funds can be applied to these vocational or trade programs rather than just traditional college or university.

Education planning is a crucial aspect of financial planning for families. By starting early, choosing the right type of account, setting realistic goals, and exploring various savings and financial aid options, you can help make your child's educational dreams a reality while maintaining financial security.

As financial advisors, we’re here to help you navigate the complexities of education planning and create a customized strategy tailored to your family's needs. Get in touch today to start planning for your child's bright future.

1. CNBC.com, 2024

2. IRS.gov, 2024

Units of the 529 plan investment options are municipal securities and may be subject to market value fluctuation. Before investing in a state specific 529 plan, you should compare your own state's qualified tuition program and any state tax or other advantages it may provide. Subject to certain restrictions. By investing in a plan outside your state residence, you may lose available state tax benefits. 529 plans are subject to enrollment, maintenance, administration/management fees & expenses. Make sure you understand your state tax laws to get the most from your plan. If you make a withdrawal for any other reason, the earnings portion of the withdrawal will be subject to both state and federal income tax & a 10% federal tax penalty. As with any investment, it is important to fully consider the plan’s objectives, risks, charges, and expenses before investing. Retirement plan withdrawals may be subject to taxation and penalties when withdrawn early.