While you are filling out your March Madness brackets, consider this: the average cost (tuition, fees, room, and board) of a degree from a private 4-year college is $187,800. The median price of a home in the United States is $200,000.
Columbia Threadneedle Investments put together a bracket listing the price tags for a degree from each college or university participating in the March Madness tournament. Some of the numbers are a doozy. (Duke… ouch.)
Colleges are more competitive – and more expensive – than ever. Parents who expect to have one or more child attend college need to start planning right away to avoid paying for college at the expense of retirement.
For most parents, funding college requires a combination of three things: cashing in investments and savings, reducing current standards of living, and borrowing money. How much of each depends on the family.
In my opinion, one of the most versatile and powerful tools a family can incorporate into their college funding strategy is opening a 529 plan for each child. A 529 plan is a qualified tuition program that allows people to save money for education in an investment account featuring tax-deferred growth (aka. no federal income tax on interest earnings) and tax-free withdrawals.
A 529 plan used to be for college only, but not anymore. Thanks to the ‘Tax Cuts and Jobs Act,’ 529 plans can be used to pay tuition at elementary and secondary public, private, or religious schools.
These savings plans are available to every single family, regardless of annual household income. There are a variety of 529 plans out there, and the rules (and tax benefits) for each plan vary by state.
What Can I Spend 529 Plan Money On?
529 plan withdrawals stay tax-free if the money is used on “qualified education expenses.” This usually includes tuition, fees, books, computers, and internet. It sometimes includes room and board, but you will need to verify that with your specific plan.
Who Can Open a 529 Plan?
Anyone with a Social Security number and a permanent address can open a 529 plan and name a beneficiary (aka. the future college student). Once the plan is open, anybody can contribute.
Who Controls the Money?
There are 2 main roles in a 529 account:
1) Account Owner: the person who opened the account. They decide when withdrawals are made. (Sometimes this person is called the “participant.”)
2) Beneficiary: the person who uses the money to pay for qualified education expenses. The beneficiary can change over time.
The account owner has complete legal ownership of the money in the 529 plan, NOT the beneficiary- even after the beneficiary turns 18 years of age. (Anyone who has ever met a teenager understands why this is a good idea….)
Who Can Make Contributions?
Everyone! In fact, young parents have started “crowdsourcing” their children’s college savings plans by encouraging grandparents, uncles, aunts, etc. to make contributions as a birthday or holiday gift. Thanks to compound interest, it’s the gift that keeps on giving (and growing).
My Kids are Already in High School. Did I Miss the Boat on This?
The earlier you can open the 529 plan, the better. Parents who wait until their children are in high school are missing out on years of compound interest that could have been accumulating in their favor.
If you are late to the game, there are other long-term strategies that can benefit your family for decades to come. Parents can help children prevent a generational cycle of college debt by opening a “family legacy” 529 plan and making contributions starting today.
A 529 plan can change owners and beneficiaries over the years. They can be passed on to kids and grandkids for generations, and there are no required minimum distributions (RMDs) on 529s like there are with retirement accounts. Your future grandkids will thank you.
Work with a New Jersey Financial Planner
Tuition is temporary, retirement is forever. You should never pay for college at the expense of your retirement. You can borrow money to fund four years of college, but you don’t want to find yourself burning through life savings and reverse mortgaging your house as a last resort to pay for your own retirement. That is the definition of a crisis.
When it comes to your financial plan, college funding is just one piece of the puzzle. Contact us today for a free consultation on how to achieve your life goals with a sense of financial security.