A finely-tuned savings plan that begins early in adult life with disciplined savers who do not deviate from the plan can save enough money to send kids to college and save for retirement at the same time. According to a CNBC article, “Saving for college and for retirement isn’t impossible,” it doesn’t hurt to have generous grandparents, but can certainly be done without them too. All you need is a solid plan and the perseverance to stick to it.
The cost of education is going to be highest for parents with younger children. For a couple with a newborn, it’s projected to cost upwards of $455,585 to send him or her to a four-year private institution. The expected cost of a public institution? Approximately $202,768.
One good way to plan is to make use of a 529 plan. Administered by financial institutions or by states, these college savings tools provide a number of benefits:
- 529 plans are professionally managed so you don’t have to! Plus, they’re readily available through either your financial planner or through state exchanges. If you go with a plan from your state of residence, there could be some tax benefits, too, so speak with your financial professionals about whether that could be a good opportunity for your family.
- All contributions are after-tax, but as long as the funds are used for education-related expenses, any appreciation of the account’s value is tax-free.
- There is no gift tax or gift tax return filing requirement if you want to contribute $14,000 in a year to the account. There could also be an opportunity to make a lump sum contribution of up to $70,000 (or $140,000 for married couples filing jointly) to a 529 if the gift is spread over five years. You’ll want to coordinate with your financial professional, CPA and possibly your estate planning attorney to really get it right.
- 529 plans won’t necessarily damage a child’s eligibility for financial aid. You’ll want to work with an experienced financial profession to make sure, but it’s certainly possible to minimize the impact. For grandparents looking to contribute a gift to a 529 plan in their estate, you’ll want to do some extra-careful planning with your estate planning attorney to ensure you’ve designated the correct beneficiary and won’t inadvertently trigger taxes.
- Some plans may allow you to “pre-pay” between one and four years of tuition. Since you pay today’s rates instead of future rates, the potential savings opportunity is significant. You’ll want to read the fine print, though, as these options may apply only to specific colleges. Talk with your financial professional to ensure you’re picking the best plan for your family.
Even with an aggressive savings plan, college could still be a stretch, especially for multiple kids. It may be necessary for a student to take out a loan. The good news about loans, however? Some studies suggest that kids take their education more seriously when they have a financial stake in it.
Reference: CNBC (November 7, 2016) “Saving for college and for retirement isn’t impossible”