Tags: Investing, Saving, College Savings, Education Planning, Children’s Education
Options for Education Planning
Education Planning for you or your children’s education is one of the most important ventures in your life. You want to give yourself or your kids a good education and we know that college education is expensive. One of the obvious steps is that you need savings for investing. So to make your needs happen, we plan financially. Start your education planning as ahead of time as you can; and be ready for the moment you need the savings for college or other education plans.
Start With Custom Financial Planning
You need to have a financial plan to meet your goals whether they be financial, personal or professional. You’ll appreciate the prioritizing that goes along with this. Your financial planning team will also help you to implement the plan. Once you’re in receipt of your financial plan you’ll be ready to start on your goals. (If you don’t already know, learn about the Differences between a Financial Planner and Financial Advisor)
For example, you’ll need to take into consideration how much time until the start date you have, and the investment returns needed to achieve the required capital; as well as if your family qualifies for any type of financial aid.
You need to have money in your bank account that you can allocate to your investment account. I’ll give you tips to save for education planning the best way for you, but none of these ideas should be implemented without first talking with a financial planner like our wise registered investment advisor representatives at Boracchia Wiviott Wealth Partners.
The more time you have forsaving, the less initial funds you will need. This is not to say you can’t do well later however. The reason you start saving as soon as you can is due to the power of compounding interest year after year. As the interest goes towards your principal, your interest continues to increase your principal. Each year your principal is higher, and while your percentage of return may not change; the higher your principal, the more money you’ll make!
Once you make the decision to save and invest, you’re on the right path.
The Amount to Save
First, you want to consider saving a percentage of your salary per month. If you need help with this, then self-awareness of your spending habits is a must! You are fiscally responsible, or strive to be, not solely for you but for your future i.e. your children’s future if you so believe, as well.
How to plan your budget
Note the obvious expenses first (the big expenses like mortgage, retirement, etc),
After the big expenses write down the small expenses (E.G: the usual coffee, clothes). You probably reviewed the big expenses before, and if you couldn’t cut any of those, you will find a lot of small expenses that, if need be, you can cut without hurting your lifestyle.
Try to save at least 10% of your salary for general investing and another 10% to general savings for emergencies. These figures will increase if you want to fund your children’s education in full or for high income earners who want to secure the same lifestyle in retirement.
What should I do with the savings?
As I said before, once you set a goal for saving for college, then you should start saving for college as soon as possible. The sooner the better.
Now I’ll review a few options that are good to save money in the long – term for college. The first is the one most people have heard of:
One of the options is to choose a 529 plan. These savings plans could be a college savings plan or a prepaid tuition plan. These plans are determined by state or private colleges.
A 529 plan is a college savings plan that offers tax and financial aid benefits, so you can save and invest for K-12 tuition in addition to college costs. Using these plans you have tax-free growth and tax-free withdrawals when the funds are used toward qualified higher education expenses. You can’t use this money for other things (like buying cars, houses).
There are different 529 plans, so there are different options. There are plans that you can deposit up to $75,000 in one year as if it were made over a five-year period. 529 plans do have limitations. The biggest one is that you must invest in the mutual fund being offered by the state. 529 plans have not always performed as well as the market as a whole, and in a 529 plan the only option is investing in each state’s plan.
There are additional options many clients prefer, for these reasons.
Coverdell Education Saving Account.
With Education Savings accounts, known as ESAs you can take advantage of tax-free withdrawals to pay for qualified higher education expenses.
You can control your investments or choose professionals to do it. This option is great if you think that you can choose better than mutual funds. Sometimes the managers of these accounts don’t spend much time deciding and don’t analyze the market too much. Mainly, like with 529 plans, they don’t have “skin in the game.”
This Coverdell account is not for everyone. It is counted as a parent asset on the FAFSA (and that is not going to negate a financial aid application either so you can still apply even with a Coverdell account). You should deposit at least $2,000 per year, and the deposits should be before the student turns 18.
The biggest caveat: The maximum that can be contributed to a Coverdell account is $2,000 per year. You can open multiple Coverdell accounts for beneficiaries with an annual maximum contribution of still only $2,000. Additionally, only married couples earning between $190,000 and $220,00 or individuals earning between $95,000 and $110,000 are able to contribute to Coverdell. Together, this significantly reduces the number of contributors.
Qualified U.S. Saving Bonds
These bonds are federal tax-deferred and state tax-free. The U.S. government backs these bonds that have an interest. Series EE and I bonds can be tax-free for qualifying higher education expenses.
One of the drawbacks of these bonds is that if bond proceeds are not spent on tuition and fees, interest earned will be included in federal income and subject to tax. Also, long-term most people want a diversified approach to any kind of investment plan.
Roth IRA deposits can be withdrawn at any time for any reason, and you can choose from a variety of investment options. However, like other accounts you draw from, if you take money for non qualified reasons you may be subject to taxes and fees. The early withdrawal penalty is 10%. To be clear, education, is a permissible reason to withdraw from your roth, and thus you won’t incur any penalties for this. It is important to recognize however many of these accounts have rules that must be followed. If not used for education, penalties apply.
Additionally roth accounts have a lower contribution than some would like. The annual amount changes each year but as of 2020 the most you can contribute is currently $6,000 a year.
There are limits on how much you earn to contribute as well (unless you are able to get a back-door roth which some planners are open to doing). Investing the maximum amount can still be less than what you desire to save; and withdrawals from a Roth IRA to pay for a college is counted as a base-year income on the FAFSA.
Custodial accounts under Uniform Transfer to Minors Act/Uniform Gifts to Minors Act
These accounts are versatile. You can spend the money on anything as long as this money goes to the minor. There are no limits to how much you are investing.
UTMA and UGMA amounts are deposited for the benefit of minors after the donor has paid tax, so these are after tax dollars. As such they are also free of gift tax to a limit of up to $15,000 or $30,000 if the gift is from a couple.
Additionally please note: You can however contribute as much as you want for the benefit of the minor. However, here gift taxes come into play.
The minor can also have this amount filed on their kiddie tax, as long as their income is below thresholds currently set at $2,100. Thereby they pay lesser, if any, taxes.
One of the main disadvantages of these types of accounts is that fees and taxes are applied. Also, these accounts are counted as a student asset on FAFSA (in other words, this can reduce the aid package significantly).
Mutual funds in a brokerage account can be spent on anything, and they don’t have limits on investment. But as simple as it is, it has cons. Earnings are subject to annual income taxes, and capital gains are also taxed. This account also counts in the FAFSA. In addition, and this is the biggest drawback, the fund managers of mutual funds are not investing for you specifically. And they are not personal in nature rather large corporations who ultimately have been known to look out for shareholders of their company foremost; and you as an investor in a mutual fund are not a shareholder. Mutual funds also have higher fees than anything else. However, with the right financial planning team, you will be in mutual funds with more positives than negatives.
Separately Managed Accounts
We have saved the best for last. As a registered investment advisory, separately managed accounts are how we help our clients. The definition of a Separately Managed Account is as the name implies, a structure in which your account is not solely invested in one type of account. An SMA as it is known is also different for each client. This is important because every individual and family has his or her own risk tolerance and time horizon. In creating a custom portfolio, and actively trading it as your advisory team, Boracchia Wiviott Wealth Partners has seen much more success than the typical 529 or other education account.
About Boracchia Wiviott Wealth Partners
The value of working with the award winning Boracchia Wiviott Wealth Partners is that our team does all the investment research and analysis and provides easy step by step instructions on implementing high level plans that the best advisors are utilizing.
We have more resources in our firm than most because of our commitment to objectivity in the financial world. Our client’s goals are foremost.
Call or text us to get started on the right plan for your family: (424) 625 – 8943
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