As the cost of a college education continues to rise, effectively outpacing the rate of inflation, it is becoming increasingly out of reach for many parents to send their kids off to university unless they plan ahead of time. For such an important and long term goal, it pays to do some research when selecting a plan. Not to mention, many questions begin to rise about the best ways to save while in the planning and researching process. Our financial advisors are right here to guide you in planning for the financial wellbeing of your family by understanding your goals, your current financial standing, and building a relationship with all of you based on trust.
There are many factors to consider when selecting a college savings plan, hence why, in order to create an effective financial plan, we analyze your finances from a holistic perspective. As with any savings goal, individual factors such as time horizon, risk tolerance, investment preferences, and tax situation need to be considered in order to select the most suitable savings plan. In addition, special consideration needs to be given to who will actually own the college funds as the decision is likely to impact the availability of financial aid in the future.
Traditional Savings Methods
College savers can opt for the more traditional methods of accumulating college funds such as savings accounts (CDs, money market funds), tax-free municipal bonds, U.S. Treasury securities, or mutual funds. If the time horizon is long, savers may be able to afford the higher risk of investing in vehicles that offer potentially higher returns. As the time horizon shortens, they could gradually move their funds into more conservative investments.
Tax Advantaged Methods
As an incentive for families to start early with their own college savings plans, there are federal tax laws for tax-advantaged methods to pay for college expenses. The methods involve different tax rules so it can be somewhat complicated when it comes to abiding by tax laws yet maximizing your savings. To mitigate this, we can work with you and a qualified tax professional in order to design a savings plan that will help you pursue your goals.
IRC Sec. 529 Qualified Tuition Plans
These plans are designed to help a family cover the cost of college by taking advantage of tax incentives provided through the federal tax code. The plans may vary between individual states and educational institutions that offer them. Since we are licensed in various states, including Texas, Florida, Indiana, California, Georgia, New Jersey, New York, and Ohio, we can help you with understanding your state’s rules and regulations.
There are two main types of 529 Plans: a prepaid tuition plan, and a college savings plan. Prepaid tuition plans involve purchasing units or credits at participating educational institutions that can apply to tuition and, in some cases, living expenses. Participation in a prepaid tuition program does not guarantee a child will be accepted into a university. Most are sponsored by state governments and have residency requirements.
College savings plans establish an account for a student that can be used to pay eligible college expenses. Many 529 College Savings Plans offer a choice of investments including mutual funds, money market funds and fixed investment.
Investors should consider the investment objectives, risks, charges, and expenses associated with 529 College Savings Plans before investing. This information is found in the issuer’s official statement and should be read carefully before investing. The investor should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.
Investments in the 529 College Savings Plan are subject to market risk and there is no guarantee that funds will be sufficient to cover all college costs. It is important to carefully consider how to invest in a 529 Plan, since it can impact a student’s eligibility to participate in need-based financial aid programs.
Coverdell Education Savings Plan
These plans enable college savers to contribute up to $2000 per year on a tax-deductible basis. The distributions from a Coverdell Plan are free from taxes if used to pay for qualified education expenses.
U.S. Savings Bonds
The interest earned from series EE and Series I savings bonds may be excluded from income if it is used to pay for qualified education expenses in the year that the bonds are redeemed. The same exclusion applies to the interest earned from these bonds that are contributed to a 529 qualified tuition program.
When saving for college, special consideration should be given to future eligibility for financial aid. Most needs based financial aid programs base eligibility on the amount of assets that are owned by the child. Generally, assets that are owned by the parents are not considered for financial aid eligibility. If assets are held in the child’s name, or in a trust for the child, they could negatively impact eligibility.
Saving for your child’s post-secondary education can be difficult if you don’t plan accordingly. Working together, we can examine your different college investment options to build a customized portfolio that takes into consideration your financial goals, risk tolerance and timeline. With the help of Pangea’s financial advisors, we will ensure your portfolio fits in with the rest of your financial plan so you can feel empowered to live a more financially-free life and secure your child’s future.
Pangea Financial Group is Your Financial Advisor for Life
Headquartered in Texas and Florida and serving clients nationwide, we exist to better serve your and/or your business. If you’d like to feel more financially free, please contact us. We would be more than happy to help.