There’s been a gradual yet tectonic shift in how people manage their money. Over the past few generations, more and more women are taking their seat at the table when it comes to making important financial decisions.
“Long-term financial decisions and impactful monetary issues aren’t just for men anymore,” said one expert at Reliant Investment Management. And what truly sets this independent investment advisory firm apart is their belief that educating men and women about finance and investments empowers them to take control of their financial position. To put it simply, you don’t have to have a mustache to have moxie with money — and that’s an idea we can get behind.
So, today, we ask Reliant questions about money, finance and investments to equip you with the knowledge you need to own your financial future.
Today’s topic: Saving for Higher Education.
SB: The idea of my kids going to college is overwhelming, especially with all the news about recent grads being saddled with student loan debt. What can I do now to fund my kid’s college education that frees them of this debt burden?
Let’s face it: college is expensive! Tuition and fees for an in-state, four-year, public university average $10,000 annually. Tack on room and board, books, supplies, transportation and the reality that your kids already have a proven track record of spending your money on other things — and you can easily get up to $25,000 per year. If your child wants to go out of state or to a private school, then the numbers go even higher. There are, however, several ways you can prepare in advance for these expenses, but the keys are to start early, save intentionally and invest wisely.
SB: So, what would you say is the best way to go about saving and investing for future college expenses?
The good news is that there are plenty of ways to save. There are several options available when it comes to the type of account you can use — custodial accounts, trusts, education savings accounts. Each of these has their own pros and cons, but if you’re confident that your child is bound for higher education — college, grad school, technical school, etc. — then an education savings account, like a 529 plan or Coverdell, provides the best benefits. What holds true in all cases, though, is that when saving and investing for a future goal, time is always on your side.
SB: I have heard of a 529 plan, but I don’t really know much about how they work. What exactly is a 529 plan and why should I have one?
A 529 plan is a tax-advantaged education savings account that is designed specifically to encourage long-term saving for future educational expenses. These plans vary by state, but all are structured with college savings in mind and, as such, allow you to take advantage of long-term investing strategies. Here are some key features:
- Tax Efficient Savings — Your contributions grow free from any capital gains taxes. Any withdrawals you make are not taxed as ordinary income as long as they are used to pay for qualified education expenses like tuition, books and room and board.
- State Tax Breaks — Many states offer a full or partial deduction on state income taxes for any contributions made to a 529 plan in your state of residence.
- Control — The beneficiary has no legal rights or access to the funds within the 529 plan, so you are assured the assets will be used for education expenses.
- Transferability — There is no limit to the frequency of a change in beneficiary if the switch is made from one qualifying family member to another (i.e., brother to sister or grandchild to grandchild).
- Eligibility — There are no income or age limits, and anyone can contribute to the plan on behalf of your child (contributions also qualify for gift tax exclusions).
- Contributions — Total contribution limits vary by state and are typically tied to the cost of public education in the state. There are no limits on annual contributions.
- Account Inception — Many states allow for 529 plans to be opened before a child is born.
SB: You also mentioned a Coverdell. What’s the difference between that and a 529 plan?
Coverdell accounts are treated in roughly the same manner as 529 plans from a tax standpoint, but there are some key differences. Coverdell accounts have a contribution limit of $2,000 per year per beneficiary, whereas 529 plans do not have a yearly contribution limit. Unlike a 529 plan, there are limits on contributions to a Coverdell account based on your income. Like 529 plans, Coverdell accounts are freely transferable between eligible family members (i.e. child, grandchild, niece, nephew), but historically Coverdell accounts have been used to save for both K through 12 and college education since there hasn’t been a limitation to the level of education that you can use the funds to cover. As of 2018’s tax reform, the same feature now applies to 529 plans. You can take up to $10,000 per year to fund private K through 12 education.
SB: What about someone who, for whatever reason, hasn’t been able to set money aside — is it ever too late to start saving for college?
No! It is never too late to start saving. Maybe some of the things we’ve already talked about won’t apply to your circumstances, and that’s OK. In an ideal world, everyone would be able to take advantage of investing and use its benefits to enhance their financial position. But the truth is that even people with debt can gain control of their finances if they have a plan and remain disciplined and dedicated to it. We all know that life happens and things change, but a good financial advisor can help analyze your situation and determine the best course of action based on your unique circumstances and time horizon. If you are late to the game when it comes to college savings, then the most important step you can take is to make sure whatever amount you do have or can set aside is secure in a very low-risk account and that you are committed to using those funds only for expenses related to your child’s education. Remember, there are plenty of ways to pay for college — savings, scholarships, financial aid, work study programs, loans, etc. — but the most important part of this process is to take account of your particular situation and determine what is in your best financial interest.
Have a question about finance or investments? Ask Reliant! Email us at [email protected] or give us a call at (901) 843-0600.
Reliant Investment Management, LLC is an independent investment advisory firm that provides customized portfolio management and comprehensive financial planning tailored to each client’s unique needs and circumstances. “Money Moxie” is intended to share opinions and general knowledge about investments, financial markets, and wealth management. “Money Moxie” is not personal advice for any specific situation and should not be construed as such. Past performance is not indicative of future results or returns. To set up a free consultation regarding your personal financial circumstances, please contact Reliant Investment Management at [email protected] or (901) 843-0600.
This article is sponsored by Reliant Investment Management, LLC.