The kids are back in school and if you have children or grandchildren, you are probably posting the annual photos showing how much they have sprouted over the Summer. I can’t believe how fast they grow! So, while we are all getting back into the regimen of another school year, it is a great reminder to review savings plans for your children’s future. Even if you don’t have kids, or yours are younger than school age, it is a smart time to begin planning for the future. Everyone has different goals, so your specific strategies will be unique, but here are some important items to consider:
According to the college board[1], the average cost of tuition and fees for the 2017-2018 school year was:
$9,970 for in-state residents at public universities
$25,620 for out-of-state residents at public universities
$34,740 for private universities
This is good info to start with, and also keep in mind inflation. For the last 10 previous years, tuition has grown at an average rate of 3.1% above normal inflation (so about 5%)[2]. When you are planning for the future, make sure to plan for future dollars.
Open Up the Dialogue
Take some time to talk with your partner or kids about the future and ideas about what they want (If you are planning on your own, call me!). These are important conversations to define expectations and talk about goals and trade-offs. If you have a specific college in mind, check out the published rates on their website. What about living situation, extra-curricular activities, options for working while in school, athletics, study abroad? All of these things can change, but it is helpful to think about. It is also helpful for kids to start thinking about these opportunities at a young age, because it provides incentive to work toward their goals.
The 529 College Savings Plan
The 529 plan is a type of account that you can open specifically for college savings. 529 plans are an excellent tool because they have advantages that other accounts don’t have. Here is what you need to know:
Your money is typically invested in mutual funds or exchange-traded funds. You can choose your investment allocation or choose an age-based allocation. These age-based allocations will start out more aggressive when your kids are younger and adjust to safe allocations automatically as they get older
Investment gains and income is tax-deferred. This means that you avoid paying taxes on earnings while your investment is growing.
Withdrawals are tax-free for qualified education expenses! This means no taxes on gains if the money is used for education.
Contribution limits vary by state but are in the hundreds of thousands of dollars
529 plans are designated to one beneficiary for using the funds, however, that beneficiary can be changed at any time. This means that if one child doesn’t use funds, those funds can be used for another child or grandchild.
Funds can now be used for K-12 tuition costs up to $10,000 max per beneficiary.
Funds can be transferred into ABLE (Achieving a Better Life Experience) programs. These are accounts that can fund costs for children who become disabled before age 26.
Some states offer state tax deductions for their residents if they contribute to their state plan. You can still use your account for out of state universities. (CA does not offer a deduction)
Make sure to do your research when opening a 529 account. You want to make sure you choose accounts that offer low cost funds so that you aren’t overpaying in investment fees. Vanguard and iShares both have 529 accounts and are known for low cost index funds. California’s program ScholarShare529 offers passive programs that have low costs (Check out www.scholarshare529.com). My529.org is another great low-cost plan for anyone to use (It is the Utah State Plan) and has some helpful tools for planning.
The Roth IRA for Minors
Roth IRAs have some really cool advantages:
Tax-deffer
ed growth (You don’t pay taxes on your investment earnings while they are growing).
Tax-free withdrawals (As long as the Roth IRA has been open for 5 years).
Contributions can be withdrawn without paying taxes or penalties at any time.
With these things in mind, the Roth IRA can be a great way to put savings away for your kids or grand-kids. The key requirement is that they need to have earned income in the year and their earned income has to be at least as much as the amount you put into the Roth. Here are some things to consider when deciding if this strategy is right for you:
Put your kids to work! Your kids need earned income, so this could be an incentive for a summer job. This can be any job from baby-sitting to yardwork, but they need to be paid for their work.
Self-employed? If you own a business, consider hiring your kids and paying them into the Roth. (Most kids I know should be tech support for their parents!)
The Roth IRA needs to be open for 5 years before money is withdrawn.
There is a 10% penalty on investment gains if money is withdrawn before 59 ½, however your contributions can be withdrawn penalty free at any time.
Up to $10,000 can be withdrawn without penalties for a first-time home purchase.
Money can be withdrawn for education without penalty, but they will have to pay taxes on any of the money that is earnings (Amounts above what has been contributed to the Roth).
Set It and Forget It (Until Next Year)
Remember, anything helps when it comes to children’s saving plans, so don’t get too bogged down in the details. Just make a commitment and start automating your contributions every month. You will be surprised how the money accumulates over time. Each year at this time, you can review your goals and update your contributions. Have fun talking with your kids and setting goals! The future is so bright!
[1] https://www.collegedata.com/en/pay-your-way/college-sticker-shock/how-much-does-college-cost/whats-the-price-tag-for-a-college-education
[2] https://trends.collegeboard.org/college-pricing/figures-tables/average-rates-growth-published-charges-decade