College Savings Archives - Rocky Mountain Financial Solutions

Saving For Your Child’s Education

jim College Planning, College Savings, Financial advisor, Saving for College February 1, 2021February 1, 2021College Savings, financial advisor, Saving for College

How and when should I start planning for my child’s education? It’s easy to shut out the noise about rising tuition costs when your kids are in grade school. But ignoring the conversation altogether does a disservice to you further down the road.

In the US, the average tuition cost at state colleges is $9,970 for state residents, and $25,620 for everyone else. Private non-profit colleges carry a heftier tab at $34,740, according to student support organization College Board.

But the price tag comes with a benefit. Research from National Bureau of Economic Research, shows that people with a post-secondary education often out-earn. Others outperform peers without some form of post-secondary education.

For many parents the question is not if you should save for your child’s education but how?

The 529 Savings Plan

529 Savings Plan are a vital tool for many parents looking to save for their child’s education. Introduced in 1996, 529 plans are state savings programs that are not taxed federally when used for “qualified education expenses”. This includes computers and, as of 2017, up to $10,000 towards K-12 tuition.

Contribution for 529 plans vary from state to state but can run as high as $380,000. However, I always try to remind clients that each individual in the US can give away up to $15,000 annually. And $30,000 for married couples, all without facing a gift tax. 529 plans also have a special rule allowing you to contribute up to five years’ worth of gifts at once.

What state can I invest in?

Given that each 529 plan is tied to a state, it can be confusing deciding which one to invest in. It’s worth pointing out that you can invest in any state 529 plan, your child doesn’t need to go to school in that state and it doesn’t have to be your own state. However, the majority of states offer a state income tax deduction or credit for residents who contribute to their own state’s plans. With that being said, different state 529 plans perform differently, which is why we work together to set up a plan that meets your educational saving strategy.

Other things to think about

Most 529 plans offer several investment options. You’re often allowed to change your investment twice per calendar year and rollover your funds to another 529 plan once per 12-month period. In addition to a general college savings plan, there’s also a prepaid option where you can purchase credits or units at certain colleges or universities at discounted prices. Fees and expenses associated with the different 529 plans are certainly something you should consider as well.

The good news is, you don’t have to navigate the world of 529 plans on your own. Let’s discuss your child’s education savings options and how to achieve the goals that will help support your child’s future.

Click here if you would like to learn more about your options and if we can assist you with your wealth management, investment, and retirement planning.

This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.

Know Your Account Types – There is a Big Difference

jim 401k, 529 Plan, College Savings, family wealth management, Financial advisor, Investing, qualified account, qualified plan, retirement, Retirement Planning, Roth IRA, Saving for College, Traditional IRA, wealth management October 13, 2020October 13, 2020401K, College Savings, financial advisor, Investing, non-qualified account, retirement planning, Roth IRA, Saving for College, traditional IRA

There are two broad categories of plan types: qualified and non-qualified. Within these groups are a number of important accounts that can help you achieve your financial goals. If you know your account types, you can better understand the advantages and disadvantages. Let’s take a quick look at each one.

Qualified Accounts

Traditional Individual Retirement Account (“IRA”)

IRA accounts are often the core account for retirement savings. Contributions are typically tax-deductible, which means made with pre-tax assets. This provides a tax benefit in the current year by lowering taxable income. IRA’s are not taxed on investment growth annually. Taxation on this account occurs at the time of withdrawal. At which time in retirement, the individual will be at a lower marginal tax rate.

401k

401ks are offered through an employer. While there are important differences and similarities between IRAs and 401k accounts, the big benefit of a 401k is that your employer can also make contributions, helping you build up your retirement savings quicker.

Roth IRA

Contributions into a Roth IRA are made with after-tax dollars. Therefore, they are not tax-deductible like a Traditional IRA. Withdrawals, however, are tax-free after five years (and other important age conditions are met), which can potentially have a dramatically positive impact on the plan. As of 2020, individuals can contribute up to an annual maximum of $6,000 if you are age 49 and under, and $7,000 if you are age 50 and above.

529 Savings Plan

If saving for post-secondary education, a 529 Savings Plan is a popular option. 529 plans are sponsored by states, not the federal government. You do not have to live in the state that sponsors the plan you choose, nor does your child have to go to school in that state. What set 529 plans apart from others is that contributions grow tax-free if they are used for college.

Non-qualified accounts

Cash Account (for investments)

The most important non-qualified account type to know about is the cash account. Unlike qualified plans, a cash account does not have tax advantages, but there are also fewer restrictions. The big benefit to cash accounts is the liquidity. You can pull money out of your account at anytime without a tax penalty. However, there may be short-term and long-term capital gains taxes to consider.

A general rule of thumb is to maximize, if appropriate to your situation, qualified plans in order to take advantage of the tax benefits, before making significant investments into a cash account.

Do you think you can benefit from one of these account types? Contact me for a consultation!

Click here if you would like to learn more about your options and if we can assist you with your wealth management, investment, and retirement planning.

529 Plans for College Savings

jim 529 Plan, College Planning, College Savings, family wealth management, Financial advisor, financial plan, Financial Planning, Saving for College December 12, 2019December 12, 2019529 Plan, College Savings, Saving for College

A 529 plan is an account specifically designed to assist individuals to save money for qualified higher education. Upon opening an account and funding with one-time, and/or, ongoing contributions, the account balance builds over time. The account is commonly invested in a mixture of mutual funds or ETFs (Exchange Traded Funds). The account grows tax-free, so you don’t pay taxes each year on the capital gains or dividends within the account. Upon needing to pay tuition bills for qualified higher education, the account can be withdrawn free of taxation. 529 plan’s are important to offer individuals and families as a way to help pay for higher education.

Advantages of 529 plans include the state tax deduction received for contributions, the tax free growth of the account, and the tax free withdrawals when used for qualified higher educational spending.

Disadvantages include market risk, for the account to grow it needs to be invested, and how you invest can vary based on risk tolerance. Another disadvantage is that if you do not use the account for qualified expenses. The growth portion of the account is taxable and there is a penalty tax upon withdrawing.

The ideal situation is to open an account when the beneficiary (your child in most cases) is born, that will allow approximately 17-19 years of account contributions and growth within the account to maximize before needing the funds for higher education. The ideal amount to save depends on the individual or parents opening up the account. This amount should be discussed with your financial advisor. 529 account contribution limits vary by state, for example in Colorado, the account can receive contributions up until the account value reaches $400,000. The contribution amount will vary based on the desired education, public vs private university, or trade school. 529’s also allow others to make contributions to the account. For example, grandma and grandpa can make gift contributions to the account on behalf of your child. Some of my clients encourage 529 monetary gifts over toys for birthday presents! And if you have more than one child, and the account is not used by the first child, the account can be “turned over” to the next child to use the funds for qualified higher education expenses.

Click here if you would like to learn more about your college savings options and if we can assist you with your wealth management, investment, and retirement planning.