Taylor Schulte | These Financial Times
How did it get so late so soon? It’s night before it’s afternoon. December is here before it’s June. My goodness how the time has flewn. How did it get so late so soon? – Dr. Seuss
A record 22 million U.S. students are headed to college this fall, according to the National Center for Education Statistics. Time flies, and before you know it, your child might be one of them.
Although it is important to start a college fund as soon as possible, it’s never too late to begin.
And keep in mind that you don’t have to fund the full amount. Many families save only a portion of the projected costs and then use it as a “down payment” on the college bill, similar to the down payment on a home.
If you are ready to start saving, here are three vehicles for you to consider utilizing:
529 Plans
Under a special rule, up to $70,000 ($140,000 for married couples) can be contributed to a 529 plan at one time, making it a popular estate-planning tool. Your contributions grow tax deferred and the earnings are tax-free at the federal level if the money is used for qualified college expenses. If, however, your child does not attend college and you withdraw the funds, earnings will be taxed and a 10 percent penalty will be imposed. The good news is, 529 rules allow you to change the beneficiary once per year. So, if “child A” doesn’t use the funds, you can utilize them for “child B” or another qualifying member of the family.
Coverdell Education Savings Accounts (ESA)
A Coverdell ESA is a tax-advantaged savings vehicle that lets you contribute up to $2,000 per year. The tax benefits are similar to a 529 but the ESA allows you to use the money for K-12 qualified expenses in addition to college. Though you have complete control over the investments in the account, Coverdell ESAs are not revocable. Distributions from the account are always paid to the beneficiary and cannot be paid back to you. Coverdell ESAs have numerous limitations and nuances, so be sure to do your homework before jumping in headfirst.
UTMA/UGMA Custodial Accounts
A custodial account is a way for your child to hold assets in his/her name with you acting as custodian until they reach a designated age, typically 18 or 21. All contributions are irrevocable and earnings and capital gains generated by investments in the account are taxed to the child each year. Assets in the account can be used for college but they don’t have to be. Often times, parents or grandparents will fund a custodian account to give the child flexibility when they turn of age. On the other hand, some are reluctant to use these accounts because they are concerned the child might use the funds in an irresponsible manner.We are all well aware of the rising costs of education. One way to help boost your savings is to consider participating in a program like Upromise, a rewards program that directly benefits the college savings vehicle of your choice. Visit upromise.com para más información.
Please keep in mind, some college savings accounts may impact financial aid eligibility. Additionally, account fees vary from plan to plan, and if too high, can hinder your savings goals. Consult with your trusted advisor(s) to choose a plan that is right for you.
—Taylor Schulte, CFP® is a Wealth Advisor for Define Financial in Downtown San Diego. Schulte specializes in providing independent, objective, financial advice to individuals, families and businesses. He can be reached at 619-577-4002 or taylor@definefinancial.com.
