One goal of many families is to have a stable financial future which includes planning for a child’s college education. Even a small amount can grow over time and help pay for your child’s future.
If you have relatives who are generous to your children for their birthday or other holidays, they might be willing to convert some of their gifts into contributions. If you have the facts about college planning, you can educate grandparents and others and allow them to make informed decisions whether they decide to help or not.
Tennessee is fortunate to have the Tennessee Promise, and the HOPE scholarship, which help, and in some cases, fully cover the cost of tuition. But did you know that the cost of a dorm room plus the generally required meal plan can cost as much as tuition? And don't forget textbooks, transportation costs, extra curriculars (sports, fraternities/sororities), study abroad or other academic opportunities. It is definitely worth saving for college to these expenses.
We reached out to Beyond Asset Management, one of our sponsors and a local group of financial advisors, to answer questions about saving for college from Nashville area families.
Charles Herron, AIF, is a Partner at Beyond Asset Management. He is responsible for client relationships, business operations, and serves as a Para-Planner. Charles has been working with clients in the financial industry since 2014, and is passionate about getting to work with people to make a real difference in their lives.
An Accredited Investment Fiduciary (AIF), Charles also holds his Series 7 and 66 securities licenses. He enjoys spending time with family and friends, going to Dale Hollow Lake, cheering on the Titans and Predators, and traveling when time permits.
Growing up, Charles was inspired by his mother who was a successful small business owner, on top of raising five children. Despite her busy schedule, she always found time for her family, clients, and community. As a business owner, Charles strives to follow his parents’ example of hard work and service.
Charles enjoys volunteering his time and giving back to the community. He is on the board for the Nashville Area Junior Chamber of Commerce, and is a member of Rotary International.
What are some financial options to save for college?
There are several ways to save for college depending on the goals and resources a family has. Most commonly used today is the 529 plan.
A 529 plan is an educational savings plan that allows earnings to grow federal income tax deferred and may also qualify for state income tax deductions, depending on where you live.
Like any investment, 529s do have pros and cons. They must be used for education (or expenses related to it), and there are taxes and penalties if used improperly. There are limitations on how much can be contributed, and some states don’t provide additional tax benefits.
However, there are many benefits. The funds can be used for much more than just tuition; including books, fees, expenses, labs, computers, on campus housing & off campus housing (if a full-time student) and more.
The law around 529s has recently been expanded to be allowed for private high school tuition and books from elementary school up to and through graduate school with some limitations that are different from the college level.
529 plans also provide quite a bit of flexibility. Funds from a 529 plan can be used by someone other than the original beneficiary, if they are in the same family. If you have a child who decides not to go to college or even better, gets a full scholarship, the funds you have saved can be passed down to your next child.
Can you set up a pre-tax college fund?
529s are regulated by every state differently. Depending on where the owner of the account lives, contributions may qualify for state income tax savings.
Typically, one would use the state sponsored 529 plan of the state you are in to qualify for any breaks. However, because Tennessee does not have a state income tax, this doesn’t apply for Tennessee residents. This allows Tennessee families to compare the benefits of 529 plans administered by other states.
Are 529 plans just for tuition and board paid to the university? Or can they be used for other types of expenses (i.e. a computer, off campus living, etc.)?
Tuition is a qualified expense for both full and part time students. Many people find it easy to use funds directly from their 529 to pay the tuition for ease of recordkeeping.
For room and board, as long as the beneficiary is a full-time student, 529 funds can be used for both on and off campus housing. The off-campus housing must be reasonable in order to qualify. For example, if on-campus housing costs $4,000 per semester, then you can use $4,000 per semester for housing and it be a qualified expense. You could then pay the difference from your own pocket if your private housing that you chose cost more.
Is there an annual maximum contribution?
Under current federal tax law, in 2018, an individual can contribute $15,000 per year per beneficiary without incurring a gift tax. Alternatively, an individual can do a single lump sum of up to 5 years of maximum contributions or $75,000 per beneficiary.
Can anyone contribute to a 529 Plan? For example, can Grandpa give the kids money on their birthday every year?
Yes, anyone can contribute to anyone’s 529 account. There is no relationship requirement.
Are there specific types of accounts that can be used for non-traditional education like trade schools?
Funds from a 529 account can be used for accredited trade and vocational schools.
What is the best way to estimate how much to save?
How are we supposed to know how much to save to actually cover costs? I have no idea if my daughter is going to want to go to school in NYC. I have no idea what the cost of living is there now, much less in 15 years. Saving for that is a lot different than saving for her to live at home and go to a community college. How do we decide on a happy medium to save for her schooling?
Great question! The truth is a family needs to decide what level they are comfortable preparing for and what level of sacrifice they are willing to make for this goal.
We find it best to have a guided discussion about priorities, goals and resources, as well as your personal beliefs about the gift of an education vs. the potential value of a student working to pay for the education themselves, or a blend of the two.
This answer is different for everyone. Start by identifying your values, then work on creating an actionable plan with the guidance of a professional advisor.
Certainly no one has a crystal ball to tell us what the future holds for our family or even what the education system will look like in 15 years. But what we do have available is knowledge about past and future estimated growth rates of the cost of higher education.
A study by collegeboard.org shows that from 2008-2018 the cost of tuition, fees, room and board has grown on average 2.6% greater than the Consumer Price Index (inflation). Backing into the necessary amount to invest on a monthly basis can be relatively easy, if you know when the funds will be used, give an estimated rate of return and use the estimated rise in costs.
The number to fully pay for a child’s education can be daunting to most. The important thing is to prioritize where fully funding estimated costs of tuition comes on the list where your hard-earned money should go.
Many families find that doing what they can after protecting themselves and putting money away for retirement is a good place to start and encouraging their children to take advantage of as many grants and scholarships as they can.
I only have a limited number of dollars available; what’s the best I can do with it?
Investing in a 529 is no different than any other investment when deciding how to pick your investments. You should always keep in mind your tolerance for risk, how much time you have until you anticipate you’ll use the funds, and how this particular account fits in with the rest of your overall situation.
These should be the primary determining factors of how to invest in any account. Working with a financial professional can help you determine where you fall on a number of these scales.
What are the options when a family has multiple children?
Would any of the money roll over to my younger son if my oldest doesn’t use it?
Funds from one 529 can be transferred to another 529 by changing the beneficiary. Note: the beneficiary on a 529 can only be changed to another member of the same family and only one time per year without incurring a potentially taxable event.
Can they use the same account at the same time?
Should my younger son have his own savings plan and what’s the best strategy for him?
Generally speaking, if there is less than four years in age between the children, you may want to consider separate accounts for each child. This is due to not being able to use the same account for multiple beneficiaries in the same year.
What happens if my child chooses not to go to college?
There are other vehicles available in the market place that offer similar tax deferred growth as 529s, but provide even more flexibility. These vehicles are not right for everyone and have their own pros and cons. They can provide a pool of funds that grow tax deferred that can be used for anything (college tuition, supplement retirement, or even a pool house).
Like 529s, they take time to build, so the earlier you get started the better. We always recommend speaking to an independent financial professional before making any decision.
If a 529 is not used for college education, the funds can be withdrawn from the account though there would be taxes and penalties incurred on the gains. Under current tax law, the penalty is 10% of the gain in addition to the capital gains tax.
If you have saved money in a 529 and your child receives scholarships, grants, or other educational funding, you could withdraw the equivalent amount from the account without incurring penalties while your child is still enrolled in school. Don’t miss this opportunity, timing is everything.
One more positive alternative; unused funds can be retained and continue to grow for the next generation. We are seeing more and more clients use this characteristic to create a family legacy around education.
Should my husband and I die, can we roll 529 plans into our executor for our trust?
You can, but it can be cumbersome for the executor to deal with. We encourage the use of contingent owners to minimize this potential risk.
When it comes to college planning, what am I not thinking of that I should be??
College education is only one element of a comprehensive financial plan. Sometimes people will save for their children’s futures before addressing their own. It is important to strike a balance among all of your goals and objectives. Consulting a professional advisor can help you organize and prioritize these effectively.
Want to Learn More?
Beyond Asset Management is a high-energy, low-pressure firm that designs custom strategies strong enough to get you to where you want to go.
They were established to address the needs of clients today, tomorrow and in the distant future. Together, they have more than 50 years of industry experience. Their leadership team represents three generations to ensure that there will always be someone here to serve you when you need it most.
The services they offer are designed to:
- Provide you with clarity of your financial truth
- Define your goals and future direction
- Organize your financial life
- Increase your financial confidence
- Ease your anxiety
Learn more about financial planning, and if you are interested in having a conversation about planning for your children’s future college education, the team at Beyond Asset Management would love to help. You can contact them for a complimentary, no obligation consultation to determine if they are a good fit for your family.
To get in touch with the team, you can send them an email at info@GoBeyondAM.com , or call their Director of Client Services, Renee Hitchcock at 615-724-5961. You can learn more about their services on their website: www.GoBeyondAM.com.
Thanks to Beyond Asset management for sponsoring this article. Their financial compensation allows us to continue reporting on fun for Nashville Families for free. Securities and investment advisory services offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc. 210 25th Ave N, Suite 1200 Nashville, TN 37203 615-385-3867