Music Retailers: Start Saving for Your Kids
The school year is drawing to a close. If you have kids, you’re probably planning for their summer activities. But have you looked further into the future—to the day when your kids say “goodbye” to home and “hello” to the college dorm? And when that day arrives, will you be financially prepared to pay for their higher education?
For the 2013–2014 academic year, the average cost (including tuition, fees, and room and board) was $18,391 for an in-state student at a four-year public college or university and $40,917 for a private school, according to the College Board. These costs may be higher by the time your children enter college.
To pay for tuition, more parents use a general savings account than any other method. These accounts carry two significant drawbacks: They typically earn tiny returns, and they offer no tax advantages.
An attractive alternative is the 529 plan. Your 529 plan earnings accumulate tax-free, provided they are used for qualified higher-education expenses. Your 529 plan contributions may also be deductible from your state taxes. But 529 plans vary, so be sure to check with your tax advisor regarding deductibility.
A 529 plan offers other benefits, too. For starters, lifetime contribution limits are generous. Even though these limits vary by state, some plans allow contributions well in excess of $200,000. A 529 plan is also flexible. If your child decides against college or vocational school, you can transfer the unused funds to another family member, tax- and penalty-free.
A 529 plan is a popular choice, but it’s not the only option available. You could also consider a Coverdell Education Savings Account, which, like a 529 plan, can generate tax-free earnings if the money is used for higher education expenses. You can typically only put in a maximum of $2,000 per year to a Coverdell account, but it does offer more flexibility in investment choices than a 529 plan.
Your children may be young today, but before you know it, they’ll be packing their bags for college. So no matter which college savings vehicles you choose, put them to work soon.
Jeff Ponte is a financial advisor with Edward Jones and previously served as vice president of sales with Mel Bay Publications. He can be reached at Jeffrey.Ponte@edwardjones.com or 855-581-1696.