Plan for Your Kid’s College and Secure Their Future
Brad and Linda, a couple in their mid-30s, were proud parents of two energetic kids, Ethan (7) and Mia (4). They had always dreamed of providing their children with a quality education, and with college costs on the rise, they decided it was time to start planning for the future.
One evening, after tucking the kids into bed, Brad brought up the topic over a cup of coffee. “I think we need to get serious about saving for Ethan and Mia’s college. Have you thought about how we’re going to do it?” he asked Linda.
Linda nodded. “I’ve been reading about options like 529 plans, but I think we should talk to someone who knows more about this. We need a plan that works for us long-term.”
Realizing they needed personalized guidance, Brad reached out to a financial advisor, Sarah, who specialized in college savings and family financial planning. During their first meeting, Sarah asked them about their current financial situation, their goals, and their timeline.
Options
She walked them through the benefits of a 529 plan, explaining that contributions could grow tax-free and that withdrawals for qualified education expenses wouldn’t be taxed. “The earlier you start, the more time your investments have to grow,” Sarah emphasized.
Sarah also explained custodial accounts like UGMA or UTMAs and how they allow parents (and others) to make an irrevocable gift to a minor that can be used for college or any other purpose. Investment earnings are generally taxed at the minor’s tax rate, which is usually lower than the parents.
The last option that Sarah talked about is the Coverdell Education Savings Account. This allows you to save for college and withdraw money for qualified higher education expenses, federal income tax deferred. However, the annual contribution limit is only $2,000 per beneficiary and higher income households may not be eligible.
Sarah advised them to think about balancing college savings with other financial priorities, such as retirement. “Remember, you can borrow for college, but you can’t borrow for retirement,” she said.
Creating a Plan
Once Brad and Linda decided the 529 savings account is what they wanted, Sarah helped them map out a plan:
Open a 529 Plan for Each Child: They decided to contribute $200 per month per child, aiming to increase the amount as their income grew.
Set Up Automatic Contributions: To ensure consistency, they set up automatic transfers from their bank account to the 529 plans.
Explore Other Funding Options: Sarah suggested they also consider potential scholarships, grants, and part-time work for their kids when the time came.
Review Annually: They agreed to meet with Sarah once a year to review their progress and adjust their contributions if needed.
Engaging Family
At their next family gathering, Brad and Linda shared their plans with the grandparents, who were thrilled to help. Ethan and Mia’s grandparents decided to contribute to the 529 plans as birthday and holiday gifts instead of giving toys.
As Ethan and Mia grew older, Brad and Linda involved them in the conversation. They taught them the importance of saving and working hard to achieve their dreams. By the time Ethan reached high school, he already had a clear understanding of his college savings and how it would support his goals.
The Result
With consistent planning, family contributions, and guidance from their advisor, Brad and Linda were able to build a solid financial foundation for their children’s future. When the time came for Ethan and Mia to attend college, Brad and Linda were proud to see their planning paid off, knowing they had given their kids a strong start in life.
Sources:
https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan
https://www.chevronfcu.org/articles/post/chevron-blog-posts/2024/07/03/college-planning-101-a-parent-s-quick-guide
529 Plan, or "qualified tuition plan," is an investment account that provides tax benefits when the savings are used for qualified education expenses. Withdrawals from a 529 plan account can be taken at any time, for any reason. But, if the money is not used for qualified education expenses, you will incur a 10% penalty and owe taxes on any investment gains.