FINANCIAL INSIGHTS ARCHIVES (2013 Year Continued...)
5 Tips for College Education Planning
May 9th, 2013
By Blaine A. Carr, CPA, CFP®, AIF®
As the days grow longer and my children get anxious for the school year to come to an end, I am reminded of the importance of planning for their college educations. I have four children between ages 5 and 12 and it is easy to get discouraged when I think about the amount their tuition, room and board, books, and other fees will add up to. While this figure is daunting, well into the six figures for each child, I am less overwhelmed when I focus on the steps I can take now to chip away at that mighty mountain.
Planning for college education costs is like planning for retirement or most major purchase goals, just with different dollar amounts, account types, and beneficiaries. What does hold true is that the outlay must be estimated, a savings plan developed, risk tolerance assessed, investments chosen, expenses and taxes reviewed, and other restrictions weighed. Thank goodness I’m a financial advisor! While most readers of this article are not financial professionals, all should follow a process similar to ours:
1. Start Early
The saying goes “How do you eat an elephant? One bite at a time.” Probably the best advice to be given on saving for education expenses is to start early. This allows the accounts more time to grow and also offers the opportunity to be more aggressive with the investments for even further growth potential.
2. Pick the Best Vehicle
There are many types of accounts you can use to save for college and all have their good and bad points. 529 Savings/Prepaid Tuition Plans allow large contributions to grow tax-free and the contributions are deductible for state income taxes in some states. However, the 529 Savings Plans have investment restrictions and the 529 Prepaid Tuition Plans (GET program in the State of Washington) offer a return similar to inflation on tuition rather than actual investments that are “owned” by the account holder. Coverdell and Roth IRAs also allow for tax-free growth and extremely flexible investment choices, but the annual contribution amounts are much lower. Roth IRAs also carry additional restrictions on withdrawals.
3. Flexibility Helps
The further out college is, the more unknowns there are. Your education planning should consider different scenarios based upon varying amounts of education expenses, which kids will incur those education expenses, and whether or not financial aid is likely to be needed and available. Many of the tax-sheltered education funding options allow a family to change the beneficiary so that the funds can be shifted to the child with the greatest need, but there is a penalty if you need to withdraw earnings for anything other than qualified education expenses. Also, the 529 Prepaid Tuition programs sometimes contain restrictions regarding where your child can go to school, and you probably won’t get all of your money back if they don’t go to college.
4. Expenses Matter
Expenses related to saving for education should be evaluated just like the actual education expenses or any other expenses in your budget for that matter. This is very important because fees reduce your investment return and leave less money available to pay for the education itself. Fees are unavoidable. If you run across an option without any fees then it is a good bet that the fees are “hidden” and you should steer clear of that option. Expenses can take many forms such as administration fees, management fees, income taxes, financing charges, and investment fund costs. Some states charge higher administrative fees or offer investments with higher internal expenses. With pressure mounting on state budgets, some states have instituted tuition differential fees, which results in a greater tuition cost than students are currently paying. For these reasons I would generally avoid using a prepaid tuition plan and instead opt for an account that contains actual investments.
5. Consult a Professional
As you have read thus far, there are many factors to consider while planning for college education expenses. While some people can tackle the plan on their own, most need the help of a professional to guide them through the many steps this process entails. A professional will help estimate education costs, select a program and investments that are optimal for your family’s specific circumstances, and monitor your progress along the way. Even though a good advisor generally provides more value than the fee charged, you must exercise due care to ensure you select one you can trust.
Like any major project or goal, a little planning up front can go a long way, and a periodic review of progress helps ensure success. This process has helped my family approach this major expense with confidence and peace of mind. Our firm, Petersen Hastings Investment Management, is available to help you chart and monitor a course that is right for you and your family.