By Paul Fenner, CFP®, ChFC®, CRPS®
The general consensus is that parents should start saving for their child’s tuition when they are very young, which will allow the money invested to increase exponentially in value. However, for some parents, particularly those who are still paying off their own student debt or who may have underfunded retirement accounts, contributing significant amounts to a tuition fund for their child may not be the wisest choice.
To understand what amount it makes sense for you to contribute to your child’s education fund, you should first understand your own wealth management plan and come up with a strategy to save for your child’s tuition that works for you. Below we’ve outlined a guide that will help you start saving for your child’s tuition at any age.
Outline Your Own Wealth Management Plan
You want the best for your child, but it won’t benefit your family if you sacrifice paying off your student debt or scrimp on retirement to contribute a large sum to your child’s tuition fund. make a plan that prioritizes paying off your current debt and building a solid retirement account while your child is young.
If you can reach some personal financial goals in a few years and pay off debt, redirect a portion of that payment to an account for your child’s tuition. If your child is 5, 10, or even 15, you still have years to contribute to their college fund, which can help them immensely.
You can always set up a savings account, but the interest you will receive on the investment is pretty low. If you want to maximize your investment, a 529 savings plan is exempt from federal income tax as long as you use the plan for tuition or room and board. Like a 401(k), the money can be invested in a portfolio of your choosing.
There are multiple significant advantages to 529 plans:
- You pay no federal taxes—neither income taxes nor capital gains taxes—if you use the savings for education expenses.
- There are often state income tax deductions or credits for putting money into a 529. If you save in a regular brokerage account, you’ll not only pay taxes on capital gains, but those gains will count as income when the financial aid administrators examine your ability to pay.
- Psychological: Having some money in reserve gives you more options, and more options mean less stress. Again, something is reassuring about having the 529 money there, knowing that you’ve set it aside for this specific purpose. I personally find this helpful.
- Flexibility: 529 plans offer the ability to contribute whenever you want, virtually any amount you wish to, and anyone can contribute. I encourage parents to set up a 529 plan even if they do not make contributions themselves. Why? Typically grandparents and other families and friends are likely interested in helping out rather than buying toys that will be discarded in a short period.
Be Open With Your Family
Once you come up with a plan, you will have a rough estimate of how much you will be able to save before your child leaves home for college. It’s a good idea to speak directly to your child when they are in high school about how much money you will be able to contribute to their education.
Keep in mind that if your child wants to go to a university that costs more than what you have saved, it is not the end of the world. They may be eligible for financial aid programs or scholarships that could go a long way toward their tuition and room and board.
We Know You Have Questions
Your kids mean the world to you and you want the best for their future. Saving for their future college tuition can be a daunting task, but not an impossible one. Schedule a free discovery meeting to learn how we can help you make the most of your financial opportunities and conquer your financial challenges.
Specifically, you can listen to our podcast (The Emotional Balance Sheet) episode with Mark Salisbury, “Walking the Tightrope of Financial Planning,” where we focus on many aspects of the college planning process.
Paul Fenner is founder and CERTIFIED FINANCIAL PLANNER™ (CFP®) at TAMMA Capital, a family office providing personalized wealth planning, portfolio management, and tax services under one umbrella to help reduce the multiple financial and lifestyle pressures facing your family. As a father of four children, including a set of triplets, Paul specializes in partnering with families to help them navigate life transitions and plan for the future to help provide peace of mind. Paul has 22 years of experience and earned a bachelor’s degree from Adrian College and an MBA from the University of Findlay. He also holds the Chartered Retirement Plan Specialist (CRPS®) and Chartered Financial Consultant® (ChFC®) designations. To learn more about Paul, connect with him on LinkedIn.