Remember when a college education was moderately priced? In the past 20 years, the cost of college tuition for public universities has risen astronomically. College students and their families have been taking on increased debt, subsequently taking longer to pay it off. Whether you have kids of your own, or grandkids, it is never too soon to start saving for their education. Here is what we recommend you think through before your kids are college age.
Should You Sacrifice Your Own Retirement? While you may feel that putting off your retirement for a few years is an acceptable trade-off, you should not have to sacrifice your retirement savings to put your children through college. Remember that student loans are federally available. While you may not want your child to assume such a financial burden, a small amount of debt could give your child a sense of responsibility, and they may experience a greater understanding of, and appreciation for, the value of their education.
How Do I Plan in the Most Tax-Advantaged Way?
Our team is equipped to advise you on several education-saving accounts that can be tax advantageous. Here’s an overview of what and why a 529 Plan might be the right fit for you.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan.
529 Plan Tax Benefits
A 529 savings plan works similar to a retirement account like your 401(k) or Roth IRA by investing your after-tax contributions in mutual funds, ETFs, and other investments. They can offer federal tax breaks and can be used from Pre-K all the way to college or other professional schools. Your investment grows on a tax-deferred basis and can be withdrawn tax-free if the money is used to pay for qualified higher education expenses. You may also qualify for a state tax benefit, depending on where you live. More than 30 states offer state income tax deductions and state tax credits for 529 plan contributions.
If you’ve thought about opening an education savings account, we would love to help you get one set up.
What Other Options Do I Have?
There are also other alternative educational paths to consider. For example, would your child be willing to complete their first two years of college at a community college, then move on to their preferred college or university later? The tuition is often much less at a community college, and you could gain additional savings if your child attends school while living at home.
So, What’s the Bottom Line?
The sooner you plan, the better. If you have not begun preparing, start now – there is no better time. If you would like to plan for your child or grandchild’s education, please feel free to call, or simply send an email. At Lam, Po & Xu CPAs, we amplify your hard work with our financial wisdom!