You’ve heard the news reporting on the drastic increase in the cost of college. If you have young children, you might be wondering how you will afford their college education. The facts support these reports: over the past 4 decades, the average cost of tuition of a state university has jumped 4x. Paying for one year’s tuition at a private college is now equivalent to buying a brand new car!
Don’t worry; there are simple steps you can take to better provide for your children’s education. Brandt Accounting can help you develop a plan to pay for your children’s college, without them — or you — going heavily into debt. With these steps, you can begin investing in your children’s future today.
Start Saving Early
An important key to paying for your children’s college is to begin planning for it as early as possible. By creating a college savings plan early, it gives you a decade or more to prepare for this hefty financial obligation. Plus, the earlier you start saving, the more time your savings has to grow, thanks to the benefits of compound interest and investment returns.
Depending on your account and plan, you can start saving for college before your children are even born! Of course, you first want to make sure you are on solid financial footing, and that you are actively contributing to your retirement accounts. Once you have a plan in place, you can start saving for your children’s future.
Choose the Right Savings Plan
Fortunately, there are some great savings plans designed to help parents save more money for their children’s educational expenses. But with more options come more decisions; you need to find the one that best fits your family’s financial plan.
A general savings account at your local bank is a common choice for parents wishing to save money for college. In fact, 45% of parents say they use this type of account to save for college. While these accounts might be more convenient for you, you will miss out on the many tax advantages offered by dedicated college savings accounts.
A 529 plan, named after the section of the tax code it’s found in, offers great flexibility and tax advantages – if used correctly. These plans remain in a parent’s name, instead of a child’s name, so you can apply the funds to any of your children.
These plans can be used to cover tuition, room & board, books, and fees for undergrad and graduate education at an accredited two or four-year college, tax free. If you use these funds for non-educational expenses, the funds are subject to income taxes and penalties.
In Pennsylvania, there is no limit to the amount a parent can contribute to a 529 plan. As a bonus, contributions up to $14,000 per beneficiary per year can be deducted from PA state income taxes ($28,000 for a couple filing jointly). That’s why many parents turn to 529 college-savings plans to grow their college savings without being subject to taxes.
Pennsylvania is one of the few states that offers a prepaid 529 college-savings plan. Instead of worrying about which investments you make and what type of return your money is earning, a prepaid plan allows you to purchase a set amount of semesters at an in-state school. Even if the cost of tuition continues to rise, your semesters will still be paid for. And if your child decides to attend an out-of-state school, the plan will pay out a standard amount.
A Coverdell Educational Savings Account is another popular way for parents to save money for their children’s education expenses. The main advantage over other plans is that an ESA can be applied to any educational expenses, including elementary and secondary schooling. But there are limitations to the account, including limits on the amount of contributions, who can contribute, and how long you can make contributions.
Roth IRAs, which are typically used for saving for retirement, can also be used to save for college. If you or your spouse will be over 59 ½ when your children attend college, you can use funds in your Roth IRA without penalty. Alternatively, if your child starts earning money and wants that money to go towards college, you can set up their own Roth IRA. They will be able to pull out these funds from their account without penalty, so long as it is used for their own education expenses.
Navigating Your Choices
With so many options available, it’s important to find the accounts that meet your family’s college savings needs. At Brandt Accounting, we can help you navigate the many choices available, figure out how much to save, and how these choices will impact your tax returns. Call us today at 717-665-2849 to schedule an appointment to discuss your college savings options.
For more tax planning advice, visit our Resources page.