Putting together a college savings plan can be daunting. The rapidly rising cost of higher education can be intimidating, but don't let the numbers scare you off. According to the College Board the average per year cost of a private four-year college is $49,320 or $24,610 for a state school.
If costs continue to rise at a higher rate than overall inflation, the cost will be much more 10 to 15 years down the road. These amounts leave many wondering if they’ll ever be able to save enough. This often has the result of avoiding the issue all together, throwing up your hands, and pretending it will all just work out.
College Savings Plan – Don’t Let the Numbers Scare You Off
If you're not currently saving, start.
Don't wait to have everything figured out before to start. You can work out the details and fine tune as you go. Don't let analysis lead to paralysis. If you're currently at zero dollars per month, start with $25. You don't need to be an expert and sort through all the different types of account before you start. I wrote an article called Don't Just Sit There, Do Something that will help you get motivated!
A little bit over a long period of time adds up to a lot!
Rome wasn't built in a day an neither will your college fund. Over time, it will grow. Will the funds be needed in 5, 10, or 20 years? The answers to those questions will be your guide. If you’re going to be investing funds for the short term like 1 to 3 years, you should steer clear of the stock market and stick with CDs despite the low rates. If you are investing with a longer-term time horizon, it would be completely prudent to allocate a portion of your investments to stocks. While CDs and savings bonds are very low risk, they may not be the best bet for returns over the long term.
Consider a 529 college savings plan.
These accounts have special tax benefits, similar to Roth IRAs. Money you sock away will grow tax deferred and withdrawals for qualified education expenses are tax free! In ordinary investment accounts, earnings like dividends and realized capital gains are subject to taxes. In general, if you use funds within a 529 for anything other than qualified higher education expenses, there will be taxes and penalties on the portion that is considered a gain. For example, if you have $10,000 left in an account and $8,000 represents your investment (or principal), you would be taxed and penalized on the $2,000. You could designate another beneficiary. If you spend the 529 funds on the new beneficiary’s education expenses you will avoid the taxes and penalties. Otherwise, you can access the funds, but you will likely incur taxes and penalties to do so.
My suggestion is that clients do not get too deep into the calculations at first. If you’re already saving, look for ways to make a small increase. The failure to start saving or even delaying it by a couple of years can make a huge difference. Once you start the savings plan, you’ll be amazed at where you can find some extra dollars here and there.
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2020 Financial Planning Cheat Sheet
Your guide to 2020 tax rates, retirement contributions, and Social Security.