Saving for College: Where and How to Do It

If it’s important to you that your children attend college, the time to start saving is now, no matter how young or old they are; the question for you to ask is where to place your savings.

If you start saving early in your child’s life, you can afford to be a risk taker in the early years, but the closer you get to needing the money, the less risk is acceptable. . A sharp downturn in the stock market right when you need money can be devastating if your investments are in market-sensitive investments.

Regardless of which savings vehicle you use, it’s key that you stay connected to your investments. Handing them over to a financial advisor blindly is not your best bet. If you need help with this, let us know during a Family Wealth Planning Session. We can help.

There are two main types of savings vehicles we do recommend you consider:

The “529 Plan” and the Wealth Creation Trust.

The 529 Plan is the most common way to save for college.  This is a college savings opportunity that is named for the section number of the Internal Revenue Service Code that provides for its use. Under a 529, taxes are not paid on the earnings if used for college, including tuition, books, and living expenses. If the money in a 529 Plan is not used for college, a 10% penalty is assessed on the earnings, though the principal may still be withdrawn tax free.

The Wealth Creation Trust does not offer any tax savings, but it does offer more flexibility. You can establish a Wealth Creation Trust for your child at an early age and then ask all of your family members to contribute to the trust for the benefit of your child at important birthdays and other rites of passage.  The funds in the Trust are held for the benefit of your child, who can become a Trustee of the Trust and learn to manage the assets when she hits a level of maturity you determine is appropriate.

Funds in a Wealth Creation Trust can be used to start a business, travel the world, or for any other purpose you determine. And sometimes that can be an even better education than college, these days.

Alternatives to big savings and risk-taking are to tap money that has been saved for other purposes–most notably, retirement. Using these funds, however, can affect a student’s eligibility for various need-based tuition assistance programs. Retirement funds withdrawn to pay college expenses are reported on the Free Application for Federal Student Aid as additional income.

Consequently, the Expected Family Contribution derived from the FAFSA will be higher and will therefore reduce the possibility of financial assistance when using retirement funds.

Two bright spots in the challenge of paying college expenses are the American Opportunity Tax Credit and the Lifetime Learning Credit. These are tax credits that allow a student or her parents to reduce his tax liability dollar for dollar based on tuition payments. The AOTC gives a credit of 100% of the first $2,000 in tuition- costs, and 25% of the next $2,000. The Lifetime Credit allows a credit of 20% of the first $10,000 in tuition costs regardless of how many children are incurring the expenses. Both programs have income limits to qualify: $180,000 and $130,000 respectively for those married and filing joint tax returns. If single, the limits are $90,000 and $65,000.

As a Personal Family Lawyer®, I can further advise you on all your options and make things as easy as possible for your family during a Family Wealth Planning Session.  If you would like to have a talk about estate planning for your family, call our office today to schedule a time for us to sit down and talk.

To your family’s health, wealth and happiness!

David Feakes

P.S.  Want to get started on the most important planning you’ll ever do for your family?  Give our office a call at (978) 263-6900 to get started.  You’ll be so glad you did.

David Feakes is the owner of The Parents Estate Planning Law Firm, PC – a law firm for families in the Acton, Massachusetts area.  David helps parents protect the people they love the most.  If you would like to receive David’s exclusive, free report, “Six Major Mistakes To Avoid When Choosing An Estate Planning Attorney,”  you can get it right here.

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At The Parents Estate Planning Law Firm, we answer your questions at your convenience; we stay in frequent communication; and we meet to discuss changes in life circumstances and in the law to ensure that your assets are protected.

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