As families prepare for another school year, many parents and grandparents begin thinking about one of the largest future expenses they may face: college. While a 529 plan is often the first tool that comes to mind, successful college planning involves much more than simply opening and funding an account.
A 529 education savings plan is a tax-advantaged account designed to help families save for qualified education expenses. Contributions grow tax-deferred, and withdrawals are generally tax-free when used for eligible expenses such as tuition, books, and room and board expenses. For many families, a 529 plan serves as an excellent foundation for education savings.
Depending on your family's goals, however, a 529 plan may not be the only solution. Some families also utilize UGMA or UTMA custodial accounts, which offer greater flexibility because the funds are not restricted to education expenses. While these accounts provide additional options, it is important to understand that the assets legally belong to the child once they reach the age of majority and may be treated differently for financial aid purposes.
Funding the education is only one piece of the college planning puzzle. Ensuring that the student has “skin in the game” increases the lifetime knowledge. A child who can properly budget and control expenses might be rewarded with the remaining balance of the 529 plan upon graduation. Having some funds available in a UTMA that can be turned over during the senior year may help develop a sense of financial responsibility—they’ll have to use their own funds to pay for “extras.” This brings into focus the true cost of college, which often extends well beyond tuition to include housing, meal plans, transportation, books, technology, and other expenses.
Perhaps the most important step is creating a plan that balances your child's future with your own financial security. While many parents want to do everything they can to help pay for college, it is important not to sacrifice your own retirement in the process. There are scholarships, grants, and student loan options available to help fund an education, but there are no loans available to fund retirement. Taking care of your own financial future first not only helps protect your retirement but can also reduce the likelihood of becoming a financial burden on your children later in life.
A college savings account is an important tool, but it is only one part of a comprehensive education funding strategy. Developing a thoughtful plan that considers savings, financial aid, tax opportunities, and your family's long-term financial goals can help position both parents and children for future success.
Securities and investment advisory services offered through Osaic Wealth, Inc., member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth.