Education Planning

"An investment in knowledge pays the best interest." 

- Benjamin Franklin 

It’s never too early, but it can be too late to start saving for a child’s education.  This can be an important point to consider if there are plans for your child to attend a private or parochial school.  The time frame of funding and the type of savings or investment vehicle must be taken into consideration.

For most families, helping your children pay for college is not a test that you wait until the night before to study for.  The annual cost of tuition is ever increasing and varies widely from private colleges, public out-of-state colleges, and public in-state colleges.  The good news is that there are many ways to fund your child’s college experience.

Many can be broken down into two categories: savings or investing.

Savings Choices

Some population choices for saving for college include savings accounts, money market accounts (MMAs), certificates of deposit (CDs), municipal bonds, U.S. Treasury bonds, or taxable investments such as mutual funds or index funds.

Prepaid Plans

Some in-state and other universities can lock in the price of tuition years in advance.  There are still a limited number of states that offer this option and nearly 300 private colleges and universities offering such plans.

Investing Choices

Understanding the different college planning vehicles can help you choose the right one for your needs.

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  1. Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. New York State tax deductions may be subject to recapture in certain additional circumstances, such as rollovers to another state’s 529 plan and withdrawals used to pay elementary or secondary school tuition, as described in the Disclosure Booklet and Tuition Savings Agreement. State tax benefits for non-resident New York taxpayers may vary. Tax and other benefits are contingent on meeting other requirements. Please consult your tax professional about your particular situation.

  2. Maximum gifts are $190,000 per beneficiary from married couples filing jointly and $95,000 from single tax filers. No additional gifts can be made to the same beneficiary over a five-year period. If the donor does not survive the five years, a portion of the gift is returned to the taxable estate.

  3. Tax- and penalty-free rollovers are subject to certain requirements and limitations. State tax treatment of Roth IRA rollovers may vary by 529 plan. Please consult your financial or tax professional for more information.

  4. Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes.

529 Plans

529 Plans are one of the best ways to save for education. With a 529 plan, your contributions are tax-deductible. You’ll also be able to skip taxes on earnings, provided that you spend them on qualified education expenses. 529 plans vary by state and have no income or contribution restrictions, so always check with your plan. 

Funds invested into 529 plans can be used for:

  • Elementary or secondary school tuition

  • College tuition and fees

  • Vocational and trade school tuition and fees

  • Off-campus housing

  • Food and meal plans

  • Books and supplies

  • Computers

  • Software

  • Special-needs equipment

Other uses for 529 plan assets:

  • Student loans

  • Roth IRA funding via rollovers

  • Change account beneficiary to another eligible family member

UGMA/UTMAs

Custodial accounts offer the most flexibility. They allow you to set money aside that then becomes the property of your dependent when they reach a certain age. However, earnings over $2,100 are taxed at the parent’s marginal tax rate. The account owner is under no obligation to spend the money in the account on education expenses, though.

Coverdell Education Savings Accounts (ESAs)

Coverdell ESAs work similarly to 529 plans. In fact, they also allow you to skip and deduct taxes, so long as you use the funds in the account for qualified costs. However, Coverdells are reserved for families earning less than $220,000. You’ll also only be able to contribute $2,000 per student annually until their 18th birthday.

Other Funding Sources

Roth IRAs

Roth IRAs are also viable options for education planning. Contributions to a Roth IRA can be withdrawn tax- and penalty-free whenever. Even earnings can be withdrawn penalty-free before age 59.5, provided they’re used for the educational expenses of a child or grandchild.

Gifting

This may be another viable alternative for funding college with family members or relatives who wish to reduce the size of their estate for tax purposes, or to those who wish to help the younger generations manage the expenses of higher education.

Savings Timeline

Saving for college requires a multifaceted approach, blending proactive financial planning with smart savings strategies. Education planning is an ongoing process that requires a blend of saving, investing, and minimizing the need to borrow through financial aid and scholarships. The earlier you begin saving, the more options you will have, and the less you will have to rely on potentially costly loans.

Birth-Infancy

  • Start automatic investing right away. Even a little bit makes a huge difference, thanks to the power of compounding.

  • Ask your parents for help. Grandparents are not only newly and justifiably proud, but they also understand how difficult it is for parents to manage a child’s financial burden alone.

  • Use the celebration of your child’s birth to encourage friends and family to give. Will the child be better served by another piece of plastic in the toy box, or that money put toward their future education needs.

Starting School

  • Shift savings from day-care/pre-school fees into 529 contributions. If your child enrolls in public school, you will probably save a lot from what you were formerly spending. Why not put some of those savings into the college planning? If you already contribute automatically, consider increasing the amount. If you don’t automatically contribute, now might be a good time to start, before you figure out how to spend the extra money.

  • Leverage expanded income if you become a two-income household. If you wait until kindergarten before both spouses work, consider putting a portion of one spouse’s income into the 529. Planning in this way can really make a long-term difference.

Middle School

  • Keep your child in the loop on college savings. Discuss the value of education, the costs of college, the support of family (and parents), and finally, the importance of the child saving too. Allowances or a first job are a great place to start.

  • Talk to your parents about making sure you are on track. Now’s the time, with over five years to go, to have an honest discussion about whether you will have enough saved for college. Accelerated gifting allows up to five years’ worth of contributions at one time.

High School

  • Start researching financial aid by the child’s junior year. A thorough knowledge of FAFSA (required Federal Financial Aid form) can identify opportunities to reduce the parents’ share of college costs that you can discuss with your tax and/or financial planner.

  • Encourage your child to put aside income from a part-time job. Negotiating over expenses in the expensive teenage years can be a challenge, but one thing that should not fall by the wayside is the child’s education. The child making a financial commitment of any kind makes the college experience more meaningful.

  • Maximize opportunities for gifts from friends and families. Achievements, birthdays, graduations are all opportunities to involve loved ones in the common goal.

Helpful tips for creating a saving and investing culture in the family:

The Five Gift Rule:

  • Something They Want:

    This allows children to share their desires and preferences, encouraging them to participate in the gift-giving process. 

  • Something They Need:

    This can include practical items like school supplies, clothing, or hygiene products. 

  • Something to Wear:

    This can be clothing, accessories, or even a special outfit for a particular event. 

  • Something to Read:

    Encourages a love of reading and can include books, magazines, or even a subscription to a reading program. 

  • Something They Can Do:

    This can be a surprise gift that aligns with their interests or a unique experience that creates a lasting memory.