My four-hour flight to Charlotte, NC for FinCon 15, the premiere personal finance bloggers’ conference, was spent sitting next to a high powered couple. They were on their way to see the Republican candidates that had a lively scrap the night before in the CNN debate. I mentioned that I was going to a conference for financial peeps with missions to teach money skills and responsibility. The woman laughed skeptically while saying, “Good Luck!” I wanted to say, “No really. It’s possible. We inspire and teach people to transform their lives.” But I was too tired.
If your little cutie wants to be a magician that wins America’s Got Talent when he or she grows up, saving for college may seem like a moot point. On the contrary. A youngster’s dream can shift faster than the speed of light from wanting to be an astronaut to wanting to be a physician like Patch Adams. Making sure your child gets a solid, relevant education is very important on their road to success, whatever they choose to do.
Keep these 5 tips in mind as you tackle the challenge.
1. Stay Tuned with Reality
Stay on top of college cost projections to make sure you are on track to save enough money. Maintaining proper perspective and focus is important to reach your financial goals.
The average cost for a 4-year education today at a private school is $129,000, which is tuition and fees only. Once you add in books, room and board, transportation and unexpected costs, that figure can grow substantially.
The cost for a private college in 18 years is projected to be $312,000 per the Family Guide to College Savings. Again, please note that these average figures DO NOT include room and board, transportation, meals or supplies.
If your mini-me braniac is Harvard bound, there’s a whole new story regarding cash outflow, so hang on to your hat. The current estimation for tuition at Harvard for a 4-year degree in 2032 is $600,000.
If your higher education strategy for your kids involves in-state schools or community colleges, the average 4-year tuition costs are estimated to be close to $100,000 in 2031.
2. Start Saving Early
If you start saving early on, the chances of reaching your financial goals increase greatly. Taking advantage of the compound interest phenomenon with an excellent investment strategy can pay off nicely if you are diligent at making contributions. The more time you allow your money to grow, the better chance you have of recovering from market dips.
For example, If you invest $5,000 now and contribute $200 a month for 17 years with a return rate of 7%, you will have $94,991 in 17 years. Using one of the tax-friendly investment methods described below would get you close to covering tuition and fees for an in-state school or a community college. Try Dave Ramsey’s investment calculator to vary estimates for different scenarios, including what you need to invest to account for room and board as well as other college expenses.
Your risk tolerance will determine how much you want to invest, the level of risk in the investments you choose, and how much you may want to keep in a regular bank account.
3. Check Out 529 Plans
529 plans are offered by states and/or educational institutions as incentive programs that have tax advantages to help your money grow, or they can lock in today’s tuition rate so that it’s actually possible to achieve your goals despite rising costs. Money in the 529 plan can only be withdrawn for qualified expenses related to education.
There are two types of 529 plans: 1) savings/investments plan… and 2) a prepaid tuition plan that locks in lower costs today, so that if tuition doubles in 16 years, your rate is locked in at today’s price. Find out more through your targeted college and/or compare state programs online.
Kiplinger’s recently came out with the Best 529 College-Savings Plans that includes detailed advice and information for the nervous Nellies as well as bulldog investors.
A common question is “What if the child doesn’t need all of it or opts out of higher education altogether?” The money is transferrable to other members of the family if unused. If little Mary becomes a serial entrepreneur after her first lemonade stand and her tech start-up gets purchased by Facebook when she is 16, then her 529 money can be transferred to her brother Billy. It can also be transferred to a first cousin (latest rule change) or even Mom who wants to go to Cosmetology school.
Otherwise, there is a 10% penalty to withdraw the unused money.
4. Check Out a Roth IRA
If your own retirement plan isn’t fully funded and you’re not absolutely sure you won’t have to pay a penalty on an unused 529 plan, talk to a financial advisor about whether or not you would qualify to use a Roth IRA plan as a vehicle to save for Junior’s college expenses.
If you do qualify, a Roth IRA is much more flexible than the standard IRA /401K because it actually allows you to take out the dollar amount you placed into the account at any time PENALTY FREE. Please note that you cannot take out any money that is earned as a result of your investments until you are 59.5 years old, except for qualifying reasons, but you can take out the principal amount that you contributed at any time.
The only drawback of the Roth IRA is the contribution limit each year. You can only contribute an amount that equals your earned income with a max of $5,500 per person & $11,000 per couple under the age of 50 for 2014.
Example: Contributing the maximum amount of $11,000 into monthly contributions from both parents… $916 per month at an interest rate of 7%, the total amount after 17 years would be $397,472.33. Your contribution amount that you would be allowed to withdraw without penalty would be $187,000, which could very well cover in-state school expenses. The remaining amount would stay in your Roth account for YOUR retirement when you are allowed to take out the earnings at 59.5 years old. This strategy works best when the amount in your Roth account is in addition to other fully-funded retirement accounts that meet your goals.
5. Solicit College Fund Gifts
Let family and friends contribute to a college fund for birthday and holiday gifts instead of giving your little one more junk that clutters up the house. The IRS offers a break on gift and estate taxes for the giver if money is contributed to a child’s 529 college-savings plan. Consult your tax professional for details on this.
Note: The content on MoneyDogz is not intended to be professional financial advice. It is for educational and informational purposes only. Please consult a licensed financial professional about your situation.