You can plan to cover your child’s future college costs through a variety of methods. It can be confusing to know how much you should have saved for college and where to save it. According to the Education Data Initiative, the average cost of attendance for a student living on campus at a 4-year in-state campus is $25,707 per year or $102,828 over 4 years. Private or nonprofit universities cost almost double with an average of $54,501 or $218,004 over 4 years. (As of April 3, 2023)
Saving early (and often) may be the key to doing this most efficiently for most families. The following are some college savings vehicles to consider:
529 Plans are offered by states and some educational institutions. These plans let you save up to $17,000 per year for your child’s college costs without having to file an IRS gift tax return. A married couple (giving jointly) can contribute up to $34,000 per year. This amount can change so make sure you check the current year’s plan limits. These plans commonly offer you options to try and grow your college savings through equity investments. You can even participate in 529 plans offered by other states. While contributions to a 529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and state tax when withdrawn, if they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or for another family member) without tax consequences. In addition, grandparents can start a 529 plan.
Single filers with adjusted gross income (AGI) of $110,000 or less and joint filers with an AGI of $220,000 or less can pour up to $2,000 annually into these tax-advantaged accounts. While the annual contribution ceiling is much lower than that of a 529 plan, Coverdell ESAs have perks that 529 plans lack. Money saved and invested in a Coverdell ESA can be used for college or K-12 education expenses. Coverdell ESAs offer a broader variety of investment options compared to many 529 plans and plan fees are also commonly lower. Contributions to Coverdell ESAs aren’t tax-deductible, but the account enjoys tax-deferred growth and withdrawals are tax-free so long as they are used for qualified education expenses. Contributions may be made until the account beneficiary turns 18. The money must be withdrawn by the time the beneficiary turns 30 (there is a 30-day grace period), or taxes and penalties will be incurred. Money from a Coverdell ESA may even be rolled over tax-free into a 529 plan (but 529 plan money may not be rolled over into a Coverdell ESA).
UGMA & UTMA Accounts
These all-purpose savings and investment accounts are often used to save for college. When you put money in the account, you are making an irrevocable gift to your child. You manage the account assets. When your child reaches the “age of majority” (usually 18 or 21, as defined by state UGMA or UTMA law), your kid can use the money to pay for college; however, once that age is reached, that child can also use the money to pay for anything else.
Cash Value Life Insurance
If you have a cash value or whole life insurance policy, you can take a loan from (or even cash out) the policy to meet college costs. The principal portions of these loans are tax-exempt in most instances. However, should you fail to repay the loan balance, the policy’s death benefit will be lower. The value of a life insurance policy is not factored into a student’s financial aid calculation. This stands in contrast to 529 plan funds, which are categorized as parental assets, even if the child owns the plan.
Imagine your child graduating from college debt-free. With the right kind of college planning, that is possible. When you meet with your money mentor, they can help you think about these savings methods and others.
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