It’s that time of year……again

Blog post #406

Over the next few weeks, students will be going back to school. 

Two of my nieces will be leaving for college soon, starting in 10 days. Other children of the members of our firm will be returning to college, high school, elementary and middle schools shortly.

It used to be that nearly all schools, colleges or K-12, started after Labor Day.

Times have changed. Schools start earlier now.

And that is one of the key lessons for saving for college….start saving early.

We all know college is quite expensive and over past decades, costs have generally risen much more than inflation. College debt is now a major national issue for many young people.

If you have children or grandchildren, we recommend that you begin starting to save for college as soon as you are able to. Depending on what fits your financial ability, we recommend a regular savings plan.

Generally, the most optimal way to save for college education is using a 529 savings plan. These plans, offered by nearly all states, allow the money that is invested in the plan to grow tax-free, as long as the money is used for college-related expenses when withdrawn.

By using a 529 plan, you will avoid having to pay taxes on any dividends, interest or capital gains. Thus, it is advantageous to move funds intended for college savings into one of these plans, rather than incur taxes in a taxable account.

These plans allow for the money to be used at nearly any college or university, and permit families to use funds for other siblings, so there is built-in flexibility.

The 529 plans offered by each state will be different than those offered by other states.Some states provide a tax deduction for deposits made by residents of their states, but these are usually minor and probably should not be a major factor when selecting which state 529 plan to use.

Each state 529 plan uses different investments or mutual funds. Each plan will have different asset allocations and varying costs. 529 plans usually offer various investment options, such as 100% stock, 100% fixed income and age-specific choices. Within these choices, there may be vast differences between how the money is invested, such as how much large v. small stocks or how much International exposure the plan provides. The key is that you should review and understand how the money is invested, or have us review this for you.

Many people choose the age appropriate option, as a default option. It is simplest. As a child gets older, every few years the age based plans decrease the stock allocation and the fixed income allocation increases. Age based plans offer diversification, automatic re-balancing and the investment becomes more conservative as college gets closer.

This concept makes sense. We have found that many age based plans may be appropriately allocated between stocks and fixed income for younger children. However, many age based plans may get much too conservative for many of our clients’ children well before they near college age. It is important to gradually reduce the stock allocation as a child gets closer to college age, say by age 15-16, which is 3-4 years before you would initially need the money, but some plans may have stock allocations of well below 50% even before high school. As college lasts 4 years, and many students take longer, and some people save more money for graduate school, your actual time horizon for using/needing the money may be longer than the perspective of many age based college 529 plan asset allocations.

Thus, it is important that you review the asset allocation of the 529 plan at various ages to determine if the asset allocation makes sense as part of your family’s overall financial portfolio. We can provide valuable advice by reviewing this for you.

By starting at a young age, you should benefit from compounding. The opposite applies if you start to save if your child is older. The later you begin to save, you will likely need to save much more each month or each year. We can help you determine how much you should begin to save based on the age of your children or grandchildren, the projected cost of the colleges that you think may fit for your child and family, and prepare projections to assist you in developing a college savings plan for your family.

If grandparents have the financial resources and it fits into their financial plan, providing money for college savings for their grandchildren can be a wonderful legacy and certainly helps their children and grandchildren. Grandparents can fund 529 plans as well as parents. If you think this may be applicable to you, please contact us.

College is expensive. Saving in the most tax efficient manner, choosing the most optimal 529 plan and monitoring how you should invest the funds are all services which we can provide to you, our clients and your families.

We can provide you with clarity in helping to save for college.

We can help you overcome confusing choices and overwhelming options.

Talk to us. 

And we would be pleased to talk to your friends and relatives about this or other topics.