It’s no secret that the cost of a college education is increasing by the day. Depending on which school one chooses to attend, the costs can be over $250,000 by the time they graduate. In fact, a college education is one of the most expensive things someone will pay for during their lifetime. That said, investing for college is a must and the sooner one starts the better.
Just like other financial goals such as retirement, time is a valuable asset to have when beginning the college financial planning process. For parents who are stressed about affording to send their child off to college, having 18 years to work with is a lot easier than having five or ten. This all has to do with the ability to have your money compound for you over time so start now!
There are many different types of college savings plans. The most common account types used for education planning are 529 plans, UGMA/UTMA accounts, and Coverdell Education Savings Accounts (Education IRA). They each have advantages and disadvantages so sitting down with a wealth manager or financial planner and discussing which account fits your situation is highly advisable. Nowadays, the 529 plan is the primary investment vehicle used for college. It is a tax-advantaged account in which the money can be used for tuition costs, books, fees, supplies, and room and board (as long as the student is at least half time). The main benefit of the account is that any distribution used towards the beneficiaries education costs are tax free. If a parent begins college planning when their child is born, odds are most of the account will be growth by the time the child is ready for school 18 years later. All of which they would not have to pay tax on as long as it’s used for a qualified college expense. The main disadvantage of the 529 plan is that if the earnings are withdrawn from the account and not used towards a qualified college expense, that money will be subject to income tax, an additional 10% penalty, and the possible recapture of any state tax benefits that were awarded to you (if any). Therefore, if a parent in uncertain whether their child will be going to college or not, they may want to consider investing in another type of account.
At Clay Northam Wealth Management we understand the benefits of the various college planning accounts and discuss each of them with our clients in detail to determine which will be the best fit in their financial plan. Servicing all of Southern California, we have 2 convenient offices located in the Los Angeles and Orange County. Please to not hesitate to contact our offices to see how we can be of value to you.