Tutorial - Your goal: affording the college of choice
College Savings Tutorial
[Excerpted from Savingforcollege.com's Family Guide to College Savings]
There are too many pieces in the college savings puzzle for there to be a single solution that fits every family. Your particular circumstances determine what's best for you. That said, there is some general advice that will help you make a plan.
Establish a savings budget. One of the first steps you should take in planning for your child's future college expenses is to establish a savings goal. There are many free college cost calculators available, including those from Savingforcollege.com, and we encourage you to utilize them. But you can also get a rough idea of how much you should be saving every month just by referring to the chart below. It shows the monthly savings goal from now through college graduation for a family with one child expected to enroll in the average four-year public university or the average four-year private college.
You can easily adjust these targets based on (1) the current four-year cost of the college or university your child expects to enroll in, and (2) the amount of savings you already have set aside for college. Simply compute the difference between those two figures (your "savings gap") and estimate a result using the table.
Monthly Savings Required to Fully Fund College Through Final Month of Attendance*
|Type of school||Public||Private|
|Current annual costs**||$19,550||$43,920|
* Assumes 4% annual college cost increase and 6% annual investment return.
** Current annual costs are based on The College Board, Trends in Pricing 2015.
Minimize taxes. Take advantage of the fact that your child can receive up to $1,050 in investment income without paying federal income tax (and at low tax rates above that amount as long as the kiddie tax doesn't apply). By gifting income-generating assets into a UTMA account now, or gifting appreciated assets later, you can effectively shift income and capital gains out of your higher tax bracket. The opportunities for tax savings may be even better if you can employ your child in the family business. Remember that any assets gifted to your children are theirs to control when they reach a certain age under state law, and that a student's assets and income are counted more heavily under financial aid formulas. Be sure to speak with your tax advisor before making any tax-related decisions.
Consider 529 savings programs and education savings accounts even for older children. Just because your child is already in high school doesn't mean you can't benefit from tax-advantaged college savings plans. If your most recent Form 1040 shows income tax on interest, dividends, or capital gains distributions, you have the chance to save taxes with a 529 plan or ESA even if only for a few years. If your state offers a tax deduction for contributions to its 529 plan, you might even benefit by opening an account and soon thereafter start taking distributions to pay college bills.
Invest tax-free whenever possible. Invest tax-free whenever possible. If your child will be attending a private or religious elementary or secondary school, consider opening a Coverdell ESA. If your child still has money in the ESA after high school it can then be used tax-free for college.
Create the right asset mix between your taxable and tax-free investments. If you maintain a fully taxable investment portfolio and a 529 plan or ESA, consider concentrating the growth portion of your investments in the taxable accounts and the income-producing portion in your 529 account or ESA. Growth stocks and low-turnover equity mutual funds are already tax-efficient and can take advantage of low capital gains rates, while income-producing investments are less tax-efficient and can benefit from the tax shelter of a 529 plan or ESA. Capital losses in a taxable investment can also provide a tax benefit, while a 529 plan or ESA cannot produce a capital loss.
Put the right person in control. Grandparents using a 529 plan to save for a grandchild's college education should open the account in their names if they want to maintain control and retain the ability to change the beneficiary to another grandchild. However, if the grandparents prefer that the parent control the account, they can simply make a contribution into the parents' 529 account. Just be sure to look up any potential state tax benefits from contributions. Some states allow anyone to claim a tax deduction or credit for contributions, but in others it must be the account owner.
Another easy way to "gift" a 529 plan contribution into an account for a grandchild is to make the check out in the name of the 529 plan and hand the check to the parent who can make sure it is contributed on behalf of the grandchild. For gift tax purposes, the grandparent is still the one making the contribution and can make the five-year election discussed here.
Invite friends and family to help. Spread the message that you have opened a 529 college savings account for your child and that you would prefer that birthday and holiday gifts be directed into your account rather than be spent on a store-bought items. These contributions can add up to a considerable amount over time. Check with your 529 plan provider, as some offer tools to make contributions from friends and family even easier.
Consider professional assistance. We suggest you consult with experienced and knowledgeable financial, tax, and/or legal advisors about all the matters discussed in this book. The issues are complex. If you are working with an advisor, ask which particular 529 plans they offer and what makes one 529 plan better than another. In interviewing prospective advisors you might even ask whether they have opened their own 529 accounts. It helps to know that the professional you are relying on has personal experience with 529 plans.
Be flexible with your college planning. Programs and investments will continue to evolve. Tax laws will change and so will your own circumstances. Review your financial situation periodically and make adjustments whenever it seems appropriate.