Updated: Oct 23, 2018
With the back to school season in full swing, now is when many parent's start to think about how they are going to pay for their child’s education. Outlays for college can be very daunting and parents need to understand both the cost and funding mechanism. College expenses have routinely exceeded the overall inflation rate and this trend shows no signs of abating. See my other blog "The ABCs of Education Investing" that discusses the details about the costs of college and how they continue to grow.
As far as funding education expenses, there are a few tools available that are better than just accumulating money in a savings account. Let's discuss these options in some detail and below is table to help you further compare the products.
The main tool used for college education is the 529 plan. Each state has its own 529 which is run with an asset manager and the moneys are usually put in to mutual fund investments. A person can invest in any state's 529 and receive the federal tax benefits, though some states provide additional tax benefits and other perks for residents using their own state's 529 plan. These tax benefits can be significant. For example, Pennsylvania allows a $5,000 per individual ($10,000 for couple) tax deduction to state taxes along with being exempt from Pennsylvania inheritance, the assets are protected from the creditors and are not counted in determining state financial aid.
The 529 also has the highest contribution amount of $15,000 per year. It is a good estate tool as it allows people, in particular grandparents, to distribute their assets to the beneficiaries. Most 529 plans actually allow others to contribute amounts to the balances, so it is a good way to put money from birthdays to work. Plus, a beneficiary can be changed to another as long it is within the same family (siblings or cousins). A 529 can also be used for k-12 expenses as of the 2017 tax changes, but please note that some states (i.e. New York) will not provide a tax benefit if the funds are used for non-college expenses.
The Coverdell Education Savings Account is the predecessor to the 529 plan and only allows $2,000 per year to be placed in to it. Assets can be invested in a wide range of products similar to that of an individual's retirement plan.
UGMA/UTMA are trusts that are setup for children. These trusts become the child’s money when the reach the age of Majority (18 or 21) deepening on the state. This money becomes the child’s money at that time and they can do whatever they want with it. It is also looked at as a child’s asset and counts more heavily towards their college education and thus could hurt them towards their college aid package.
If you would like to learn more about education funding or to see how much it may cost to send your kids to school, please setup a call with us.
These online calculators can be useful to help estimate how much college may cost: