Back to school and saving for college
It’s back to school for kids across the country. You may be lamenting the cost of school supplies and the expense of last minute new clothes to cover that summer growth spurt. Whether your child is learning to read or learning to drive this year, you’re probably focused on the new school year ahead of your child(ren) and less focused on the future. But one day, “back to school” will mean college, including tuition costs.
No matter how old your child is, it’s never too early, or too late, to start saving for college. Having a college savings plan will allow you to dream of the day your child strides across the stage to receive a diploma instead of dreading the day the tuition bills arrive.
Start with a strategy
On average, tuition costs have increased between two and five percent annually in recent years. Four years at a private college or university, including room and board, currently tip the scales at approximately $180,000.1
You may want to begin your college savings plan by developing an asset allocation―the mix of investments in your portfolio―based on the length of time until your child enrolls. The more time you have, the more you may want to rely on stock investments to reach your goals. Stock investments, generally subject to more short-term market volatility than other investments, may offer the potential for higher long-term returns. As tuition bills appear on the horizon, you may want to shift your asset allocation toward potentially less risky investments, such as bond and money market funds.
Take this into account
Also consider the type of account you use to invest for your child’s education. A 529 college savings plan lets you contribute either on a prepaid plan or a savings plan, and your withdrawals may be tax-free if they are used to pay qualified college expenses.
Another avenue to consider is a custodial account. The Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allows you to open an account in your child’s name and potentially save on taxes. If your child is under age 18, the first $1,050 of earnings may be free from federal taxes and the second $1,050 may be taxed at the child’s rate, which could be lower than yours. Be careful though — use of a custodial account could affect your child’s financial aid eligibility.
Finally, don’t overlook tax incentives and financial aid. The American Opportunity Tax Credit and the Lifetime Learning Credit, two federal tax credits, can help offset qualified education expenses. Plus, tens of billions of dollars are available in financial aid in the form of loans, scholarships and grants from government and institutional sources.
Paying for college is a long-term commitment. Determining how to cover the costs should take into consideration a family’s current financial needs as well as its short- and longer-term financial goals. Consider discussing your options with your financial advisor and tax professional.
1Source: The College Board, Trends in College Pricing, 2016, October 2016.
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Investing in 529 Plans is subject to investment risk, including possible loss of principal. Before investing, carefully consider the investment objectives, risks, limitations, features and benefits of the product and its underlying investment options. This information can be found in the official statement. Copies are available through your representative. Please read carefully before investing.