If you’re a parent, the start of a new school year may have you considering how much you’re able to set aside for your child’s college fund. The national average for annual college tuition for 2022-2023 is over $39,000 for private school and over $10,000 for public, in-state tuition¹. And, that does not include living expenses. Plus, those numbers may rise by 2%–3% in the next school year. So the sooner you start saving for your child’s future, the better.
Qualified tuition plans, or 529 plans, are tax-advantaged savings plans sponsored by government agencies or educational institutions. They are among the most popular college savings funds, allowing parents (or friends and relatives) to contribute to a child’s future college tuition expenses.
There are no annual contribution limits to 529s; however, they are considered gifts for federal tax purposes, and tax-free individual gifts cap at $16,000 annually in 2022. Contributions are not deductible at the federal level. However, they do grow tax-free, and withdrawals are not taxed as long as they are used to pay for qualifying educational expenses, such as tuition, room and board, and meal plans. In most states, contributions to and disbursements from 529s are exempt from state income tax. Plan options and tax benefits vary from state to state, and you can use most states’ 529 plans, so shop around for the best options for you.
Alternative Savings Plans
You don’t have to save for college expenses in a plan that was specifically designed for it. The following investment accounts are sometimes used to save for college expenses. Each option may impact eligibility for financial aid, so consult a financial aid advisor before investing.
Custodial accounts known as Uniform Gift to Minors Act and Uniform Transfers to Minors Act (UGMAs and UTMAs) have few restrictions on the types of assets they can hold, and funds are disbursed to the beneficiary when they reach the legal age of majority. These vehicles are often taxed at a lower rate because the beneficiary is a child. Since there are no spending restrictions on UGMAs or UTMAs, the beneficiary is not bound to spend the money on education expenses.
Parents might also opt to invest college funds in a Roth IRA. Typically used as a retirement fund, a Roth IRA can also be used as an investment vehicle for college as well. Withdrawals made to pay for qualified education expenses are exempt from early withdrawal penalties.
Start saving for your child’s college as soon as you can to take advantage of the power of compounding returns and continue to make regular contributions as your child grows. Have questions? We can help you find the most effective option for your family – just call (602) 343-9301 or click here to schedule a call with one of our advisors.
Sources: ¹ https://www.usnews.com/education/best-colleges/paying-for-college/articles/paying-for-college-infographic
This content is provided for informational purposes only. It is not a guarantee of future success, is subject to change, and is not intended to serve as the basis for an individual’s financial decisions. Strategy Financial Group is not affiliated with the U.S. government or any other government agency. Investing involves risk, including the loss of principal. Strategy Financial Group does not provide specific legal or tax advice. Please consult with a qualified professional for guidance on your individual situation. Investment advice is offered through Strategy Financial Services, LLC, a registered investment adviser. Insurance and annuity products are offered separately through Strategy Financial Insurance, LLC.