Before you can talk about savings strategies for your children’s college education, you must be crystal clear on how you are going to pay for it. By taking a hard look at your current financial situation and current family dynamic (including how many children you have), you will gain valuable perspective on how much money you can realistically contribute.
First, it is important to determine your personal values regarding paying for your children’s higher education.
To do so ask yourself the following questions:
Do I want to pay, in full, for my child’s college education? Do I want my child to share in some of the expense? How do I feel about my child having to repay loans? Is there anyone else in our family who wants to help fund my child’s education? Do I need to consider advanced education such as an MBA, law degree, etc. and how will this be funded?
For many families, a 529 plan can form the foundation of their college savings strategy. A 529 plan is a low maintenance investment account dedicated solely to funding college expenses. These plans facilitate easier college savings in many ways:
- You can invest in a 529 plan regardless of how much you earn. There is no minimum to get started, so the sooner the better!
- Many plans offer an automatic investment plan which allows the 529 plan to withdraw a specified amount of money each month from your checking or savings account.
- The account grows tax-free. Distributions are free of federal and most state income taxes when used to pay for qualified education expenses (tuition, books, computers, etc). This is especially advantageous if the account is started when the beneficiary is very young and has ample time to reap the benefits of the tax-free compounded growth.
- If you have multiple children, the tax-free benefits that are not used by a 529 beneficiary can be transferred to a sibling.
- Anyone can own an account for a beneficiary (e.g. relatives or friends) or contribute to a 529 plan.
- Parent owned 529 plans get favorable financial aid treatment. 529 plans owned by a dependent student’s parent or a dependent student are reported as parental assets and have a relatively minimal effect on financial aid eligibility.
- Contributions to a Michigan’s 529 savings plan of up to $5,000 per year by an individual, and up to $10,000 per year by a married couple filing jointly, are deductible in computing Michigan taxable income.
For more information and guidance, schedule a meeting with your advisor to see if this is a viable option for your family.
