My BABY is starting Kindergarten this year. My beautiful little daughter that still crawls into my bed in the morning. The one whose eyelashes are so long she looks like a doll when she’s sleeping. That baby is going to be getting on a bus and heading off to school this year. There is a constant chorus of people saying “they will both be off to college before you know it” these days. No matter how much I’d like to slow things down I believe this statement is true. The past 7 years as a parent have been the shortest (and longest days) of my life. Time is precious. It also has value when it comes to investing and saving money. That concept inspired me to start their college savings accounts when they were 8 weeks old. If you haven’t started saving for college but want to there are different ways to do it. Here are some tips on how to get started.
Collect the Facts
There are a lot of variables when it comes to college. Will it be free someday? Will it get more expensive? Will companies care about a college degree in the future? These are all great questions. Unfortunately, when people ask me my answer is “I don’t know” every time. Choose to deal with the facts that are in front of you. For example, I have two children that are 5 and 6 years old. Everyone in their family has graduated high school so I’m fairly confident they will as well. The majority of us have attended college. Some dropped out, others finished and their Aunt decided to make a decade of it and got her PhD. These facts lead me to believe college is likely for one or both of them.
We live in Massachusetts which offers a a tax deduction for saving in a 529 college savings plan. You can check your state here. My company has a 529 plan they offer where I can invest through payroll deduction. We are not professors or employed by a university that might offer tuition as a benefit. We also do not have any rich family members looking to remove assets from their estate (boo). My children – despite the eyelashes are not models or doing any work that would provide an income. Since they are 20 months apart there is a good chance they will be in college at the same time for a few years. These are my facts. What is right for me might be the wrong decision for my friends or clients so looking at everything objectively is step one. Once you know your facts you can move on to step two.
Choosing the Right Account
There are several different types of accounts that you can use to save for college. You should consider the pros and cons of each type before you decide what is right for you. Knowing your facts will help make these decisions easier. Here is a highlight of some of the basic advantages and disadvantages a few popular options provide.
- Savings and checking accounts:
- Easy to open and you already have one
- Safe places for money to be stored
- Some high yield savings accounts pay ~2% interest
- Tuition is outpacing inflation
- Tempting to use for other purposes
- 529 College Savings Plan
- Tax free growth when used for qualified education expenses (K-12 tuition, room and board, equipment, books..)
- Some states offer tax deductions or credits
- Beneficiary can be changed to other family members
- Tax penalty if the money is used for unqualified purposes
- Fees could be high depending on the plan
- Investment options could be limited
- Roth IRA
- Money can be used for Retirement or College
- Excluded from income/assets for Financial Aid or FAFSA
- Your contributions can distributed later to pay off student loans
- Child needs taxable income to contribute
- Lower contribution limits (IRS determines annually)
- Return of contribution is considered non-taxed income and could impact financial aid eligibility in Jr/Sr + years
- Custodial Account (UGMA/UTMA)
- Money can be used in various ways as long as it benefits the minor (ex. off campus apartment or car)
- No contribution limit
- Included as the minor’s asset for FAFSA
- My children could take this money and go to Vegas and bet it all on black the day they turn 18.
- Coverdell Education Savings Account
- Tax-free withdrawals for K-12 expenses
- Maximum contribution is only $2,000 annually
- Counts as a parental asset on FAFSA
- Income restrictions for eligibility
- Account must be distributed by age 30
Getting started is the most important thing you can do when it comes to saving money. There will always be other things to use your money for and fires to put out. One day your child will be that pressing financial need. If you haven’t saved for college it is tempting to look at other stockpiles of money like your retirement accounts or home equity to pay for school. This could cause you to compromise your own goals to help your child with theirs. However, similar to the airplane I believe it is important for parents to put their mask on before assisting others. If I can’t afford my own needs later in life I will likely become a burden to the same children I want to help. For me, that doesn’t work. So I save a small amount every paycheck towards their 529 accounts. Depending on your goals different accounts or amounts might make more sense. What matters most is that you are consistent and happy with your choices.
Are you still in school or saving for someone else to go someday? Any tips for the first day of Kindergarten (for me)? Drop your best tips in the comments!