A NO NONSENSE GUIDE TO SAVING FOR COLLEGE HOW TO SAVE FOR A CHILD AT ANY AGE.

Transcription

1 A NO NONSENSE GUIDE TO SAVING FOR COLLEGE HOW TO SAVE FOR A CHILD AT ANY AGE. 1

2 Life insurance is an important part of planning for college to protect your family in the event you re not around to help pay the high costs of a college education. I encourage you to speak with your insurance agent or an SBLI representative about how SBLI can help you secure the life insurance you need to protect your loved ones. Best wishes for a wonderful financial future. JONATHAN POND JONATHAN POND is one of America s most trusted and knowledgeable financial experts and a pioneer in bringing low-cost personalized money guidance to American households. His work in educating the public on financial matters has been far-reaching and widely recognized. His 16 prime-time public television specials and 21 books have been critically acclaimed for their effectiveness in providing useful and understandable financial guidance to people of all financial circumstances. The comments and opinions expressed herein are solely those of the author and do not reflect the assent of SBLI or its officers, agents, or employees. SBLI and The No Nonsense Life Insurance Company are registered trademarks of The Savings Bank Life Insurance Company of Massachusetts. NAIC # The Savings Bank Life Insurance Company of Massachusetts, Woburn, MA. All rights reserved. 2

3 I lose some sleep whenever I look at the projections of how much it s going to cost to educate my kids. When I add it up for three kids, college costs look more like the federal debt than a bill I will have to pay. Don t even think about trying to save every last cent it will cost to pay for college. It would require putting aside more money than you could possibly afford. Instead, plan on setting aside an amount you can reasonably afford each month. And remember, don t start saving for college until you ve made generous contributions to your retirement plan. While it s great to save for your children s education, it s more important (and more financially advantageous) to save for retirement. Finally, avoid setting your college savings sights too high; if you find that you can t save what you d ideally like to, you may become discouraged and not save at all. Saving for Your Children at Every Age How you invest money for college depends on how long it will be until you need to use it. The further your child is from starting college, the more risk you can afford to take. If the child is under thirteen, invest the money just as you would your retirement money. The majority of the money should be invested in stock mutual funds and perhaps individual stocks. If you have children in their teens, you should gradually shift your money out of stocks into more conservative investments. Why? Because college is now just a few years off, which means you re becoming a short-term investor. You don t want to risk having too much invested in stocks that could take a tumble just before the tuition bills arrive. The following is a suggested timetable that gradually changes your college investing allocation as the child approaches college age. AGE Stock Funds 60% 50% 40% 30% 20% 10% 10% Bond Funds 30% 30% 30% 20% 10% 10% Short-Term Investments 10% 20% 30% 50% 70% 80% 90% 100% 100% 100% 100% 100% 100% 100% 3

4 The Family Wealth Factor If you re fortunate enough to have money from sources beyond your college savings to help pay for the cost of higher education, you may not need to become as conservative with college funds as previously outlined. If you lose money on your college investments, you ll have your other resources as a backup. Custodial Accounts Should you keep the college savings fund in your name or your child s name? There are tax advantages for putting at least some of the money in your child s name in a custodial account. A limited amount of investment income earned in a custodial account for a child under age 18 is taxed at the child s lower rate. For the 18-and-over set, there are no such kiddie tax limitations. Second, building up money in your child s name could be a liability if you think you may qualify for financial aid. Under the complex formula for calculating financial aid eligibility, the child is expected to contribute a higher percentage of her investments than you are of yours. This means that putting all the money in your child s name can wipe out your savings, while leaving it in your name can preserve some capital for your later years. My advice is to put some money in a young child s name and take advantage of the lower taxes. Once the child reaches the teen years and you can be at least somewhat more certain about his or her responsibility and college aspirations, shift more money to the child....there are tax advantages of putting at least some of the money in your child s name in a custodial account. On the other hand, for many families the best way to save for college is through a 529 plan, which is described on the next page. (You may be able to move money out of a custodial account into a 529 plan. Ask the plan administrator.) But putting too much money in a child s name can backfire. First, there is no guarantee that your child will spend the money on a college education. Once children reach the age of majority, age 18 in many states, they can t legally be stopped from using the money any way they want. State Prepaid Tuition Savings Plan Many states now offer tuition savings plans. Are these a worthwhile place to invest college money? As with most matters financial, it depends. Some of the programs are quite attractive; others not so much. The after-tax money you contribute to a prepaid tuition plan grows tax-free. In general, the investment returns are best if the child goes 4

5 to one of the participating colleges, usually a state school. But if the child opts for another college and most parents would prefer not to restrict their kid s college choice then the likely returns will be much lower. If your state s tuition savings plan is appealing, go ahead and participate, but with only some of your college savings 25 percent, perhaps. Consider this money to be a rock-solid foundation for your college savings one that won t plummet if the stock market dives but don t go overboard. You can probably get higher investment returns elsewhere. Coverdell Education Savings Accounts The annual contribution limit on education IRAs, which are now called Coverdell Education Savings Accounts, or ESAs, is $2,000 per child. Your income must fall within certain limits to qualify for a contribution. Contributions to ESAs can be used not only for college tuition and expenses, but also elementary and secondary public or private school expenses. Withdrawals are tax-free as long as they re used for qualifying education expenses. You can find more information about Coverdell Accounts on the IRS website: Savings-Accounts. The Family House As as a A Source of Of Tuition Payments I m not talking about taking out a home equity loan to help pay college costs, although that may be necessary. Rather, I m referring to the fact that some families try to pay off their home mortgage by the time their kids go to college. No mortgage means more money each month that can be used to pay college costs. Not a bad idea, if you can afford to pay off your mortgage that soon. 529 Plans 529 plans, also called qualified tuition plans, are still not well understood by many parents or grandparents saving for their children s or grandchildren s education. This is a pity, because for many college savers, these plans offer the best tax and investment benefits. Here s how 529 plans work: You make aftertax contributions either in a lump sum or in installments to your state s college savings plans, which are invested by a major mutual fund company selected by the state. There are no income limits for participants, and you don t have to live in a state to participate in its program. 529 plans don t restrict the choice of colleges either. The money inside the 529 plan grows tax-deferred. Distributions to pay college expenses are not subject to federal income taxes and may not be subject to state income taxes either. Money invested in the plan is considered to be owned by the parents, 5

6 not the student. This could help the student qualify for more financial aid, since a higher percentage of the money in a student s name must be used to pay tuition than money in a parent s name. 529s are well worth considering if you want and can afford to put money away for your children s education. But you need to do some homework first. Don t automatically assume that your own state s program is the best. It may be particularly if it offers additional tax breaks for residents but spend time examining various state programs. Some assess higher fees than others do. An investment advisor can choose a program for you, but there will be the advisor s fees to consider. Don t automatically assume your own state s program is the best. Be sure you re comfortable with the quality of the investments that will be made by the 529 plan you choose. Most states have hired top-notch companies to select and handle the investments, but a few states use firms whose funds have mediocre track records. If you become unhappy with the performance of your chosen 529 plan, you re allowed to roll the money over to another plan once every twelve months. When it comes to the allocation of funds within your 529 plan, some plans allow you to design your own portfolio, while others offer (or require) an age based investment option. In this case, the plan administrator will diversify the money in the plan while gradually investing it more conservatively as your child gets nearer college age. To find out more about 529 plans in general or the specifics of various state programs, visit these helpful websites: and A Final Suggestion Saving for college is an important financial goal for all parents. Securing enough life insurance protection to help pay college costs if a parent dies beforehand is equally important. I encourage you to speak with an SBLI representative about how SBLI can meet your life insurance needs. You can talk to an SBLI representative at or chat online at SBLI.com. Jonathan Pond NNG-College813 6