MONEY MATTERS: Saving for college? Here are key points to consider
As students head back to college, millions of parents are hoping their younger children someday can do the same.
With the costs of college continuing to rise and many students and families saddled with heavy debt, saving for college has become as important as ever. Many people started savings plans early, while others either could not afford to or procrastinated.
The bottom line is learning all the options that fit with a family’s financial situation.
It’s never too late, but most people wish they had started sooner, and many don’t know what investment option is best for their college funding needs. Be honest and realistic about the college part of your family financials, and from there you can decide on ways to get there in discussions with a planner.
The following points should be explored and evaluated before going forward with a college savings plan:
Your risk tolerance level
Before committing to a college savings plan, it’s important to determine how much you can afford to risk. Just like anything in life, the higher the risk, the higher the potential reward. If you start very early you likely can go higher risk somewhere down the road. At the same time, risk tolerance – and protecting your principal – is very important because college savings is a usually more conservative investment; it’s a targeted investment, meaning you need an amount of money by a specific date.
The pros and cons of 529 plans
The 529 plan is an immensely popular college savings tool. Among the benefits are tax-deferred growth and tax-free withdrawals when savings are used for qualified education expenses. And as of 2019, individuals can contribute up to $15,000 per 529 plan, per child annually without triggering a gift tax. However, there are some disadvantages, such as limited investment options and a 10 percent tax penalty applied when money in the account is used for non-qualified education expenses. The 529 has traditionally been the way for many families, because you hear about it the most. But if you’re getting a late start on college savings, this may not be the plan for you. You may have to play catch-up by contributing larger amounts, and you also have a shorter window for seeing your investments recover from market volatility.
Non-traditional college savings plans
One of the best things some people can do is look outside the box of traditional planning vehicles. There’s a big argument for adding an additional level of equities. Some say you would be better off buying a mutual fund or exchange-traded fund to fund college. For example, with some funds averaging 10% to 15% in the market the past 10 years, those who did exceptionally well took more market risk, exposing the principal to loss or gain. On the other hand, perhaps try a Roth IRA. It could double as a college savings account as well as a retirement account. There’s no 10% penalty when Roth IRA withdrawals are used for qualified higher education expenses, but ordinary income tax may apply to any earnings withdrawn before the age of 59½.
When drawing a conclusion on a plan of action, stick to it the best you can. Consistency wins the race.
Editor’s Note: Alexander Joyce is CEO and president of ReJoyce Financial LLC (www.ReJoyceFinancial.com), a full-service retirement income planning firm in Indianapolis..