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Education Savings Starts Now

October 7, 2011 by Blue Ridge Leader filed under Amy and Dan Smith, Columns No Comments
Amy Smith-BRL

With kids of all ages back in school and fall in the air, it’s a good time to talk about education funding for the children in your life.

Before your child was even born, you were planning. What will we name him? What color should we paint her room? Who will he look like? What will she become when she grows up?

But with all the decisions parents face, there’s an important one they often overlook—college. And yet, with tuition rates rising, it should be at the top of every parent’s planning list no matter what the child’s age.

What’s more, saving for a child’s education doesn’t necessarily have to rest entirely with parents. With the flexibility and convenience of today’s savings plans, many alternatives make good sense for grandparents, aunts and uncles, other family members and friends, who can contribute or set up their own plans.
Start planning today

If your child is young, then time is on your side. By starting early, you may be able to invest less money now, and thanks to the potential impact of compounding returns, let your savings do much of the work for you.

Don’t panic if your child is already in high school. While you may need to invest more money in a shorter time frame, you should still be able to afford at least a portion of college costs.

many new college savings alternatives available, it is critical to choose the one that’s most appropriate for you. Selecting the wrong plan – or not investing properly within the right one – can prohibit you from maximizing your savings.

What to consider before selecting a plan

  • What are the tax benefits?
  • Who controls the funds?
  • How much risk is involved?
  • What are the investment options?
  • What are the tax consequences if I change the beneficiary?

529 Plans for college savings are popular tax-advantaged savings vehicles that have revolutionized the world of college savings much as 401(k) Plans revolutionized the world of retirement. As of June 2010, total assets in college savings plans reached an all-time high of $135.2 billion. (Source: College Board’s Trends in Student Aid 2010.)
Choosing a college savings plan

While you can choose any state’s 529 college savings plan, it helps to consider a few key features to make the process easier:

  • Your state’s tax benefits: A majority of states offer some type of income tax break for 529 college savings plan participants, such as deductions for contributions or tax-free earnings on qualified withdrawals. However, some states limit their tax deduction to contributions made to the in-state 529 plan only. So make sure you find out the exact scope of the tax breaks, if any, that your state offers. (See the Virginia 529 website for this information in our state.)
  • Investment options: 529 plans vary in the investment options they offer. Ideally, you’ll want to find a plan with a wide variety of investment options, from conservative to more growth-oriented to match your risk tolerance.
  • Fees and expenses: Fees and expenses can vary widely among plans, and high fees can take a bite out of your savings. Typical fees include annual maintenance, administration, and management fees.
  • Reputation of the financial institution: Make sure that the financial institution managing the plan is reputable and that you can reach customer service with any questions.

Opening your account

Once you’ve selected a plan, opening an account is easy. You’ll need to choose a beneficiary and one or more of the plan’s investment portfolios. Typically, you’ll be required to make an initial minimum contribution, which must be made in cash or cash equivalent. You can tailor the frequency of your contributions to your own needs and budget. Most plans will allow you to change your investment portfolios periodically if you’re unhappy with their performance. You’ll also be able to change the beneficiary of your account to a qualified family member (e.g., siblings, stepsiblings, parents, nieces, nephews, aunts, uncles, first cousins) with no income tax or penalty implications.

You have big dreams for the child in your life. Don’t let lack of planning sidetrack those aspirations.

I welcome your comments. Just send me an email at amy.v.smith@raymondjames.com. All names and identifying information will be kept strictly confidential unless written permission is given for their use.

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