Parents have so much to think about after the birth of a child: Breastfeeding tips? Ways to save on the cost of formula? Best sleep strategies for baby? Transitioning to daycare? Helping siblings adjust to a new baby? The list goes on and on. With so much requiring our attention during the early years of childhood, it is easy to overlook saving for college. When you have changed your 20th diaper of the day, college may be the furthest thing from your mind! Yet, with tuition costs rising annually, preparing for a child’s future education should not be delayed.
But where to even begin? What do parents need to know? Luckily, my good friend, Robin Mitler, happens to be a personal financial advisor and co-owner of New Potomac Partners, a boutique money management firm located in Bethesda, Maryland. She also happens to be a mom to two young boys herself! I knew she was the perfect person to have answer a few questions for me about successfully saving for college.
1) What are some common misconceptions that you hear from parents when it comes to saving for college?
Myth #1: My children are still young, so I don’t need to start saving for college yet.
It’s important to start saving as early as possible so that your money has more time to work for you. You can open a 529 plan for a child as soon as they have a social security number.
Myth #2: I have waited too long to start saving, so nothing I do now will make any difference.
It is never too late to start saving for college and have your money benefit from a tax-advantaged plan! In fact, you can open a 529 plan at any time for your child, even after they have started college. A 529 plan is a tax-advantaged savings plan, meaning that the money you invest is allowed tax-free growth, and any withdrawals can also be made tax-free when used toward eligible expenditures. Remember that the money in a 529 plan can be used for any higher education, including graduate school, medical school, law school, etc.
Myth #3: I opened a 529 plan, so there is no need to consider any other savings options.
With the high cost of most colleges today, the savings from a 529 plan are often just one important piece of a family’s overall paying-for-college strategy. Beneficiaries of a 529 plan can still be eligible for financial aid. Additionally, beneficiaries can still consider and apply for college scholarships. How to best pay for college can look different for everyone. It involves many individualized choices that reflect a given family’s particular needs and circumstances.
2) When should parents start saving for college? What is the first step?
Before you start saving for college, consider whether your family is in the financial situation to do so.
- What is the status of any personal debt? For example, are credit card and/or student loans paid off or at a minimum?
- Do you have an emergency fund of cash set aside to cover 3 to 6 months of non-discretionary expenses, such as mortgage payments, food, etc?
- Are you currently utilizing an IRA or employer sponsored plan to save for retirement?
After assessing your personal finances, the first step is to investigate the different college saving options. My personal favorite (and the option that I recommend to my clients) is to open a 529 plan, which as I noted before, is a tax-advantaged savings plan. The next step is to estimate the cost of college for your child and then decide how much you would like to save.
3) What are the most important things to know about a 529 plan?
There are two types of 529 plans: college savings plans and prepaid tuition plans.
College savings plans and prepaid tuition plans offer different benefits. I usually prefer that my clients go with the college savings plan option because it offers more overall control of your investments. A personal financial advisor can help you decide which plan is right for you and your family.
The beneficiary of a 529 plan has options.
The funds from a 529 plan can be used for a number of different educational expenses. Whether you are looking at 2- or 4-year colleges, in- or out-of-state options, trade schools, or private vs. public institutions, there is a 529 plan for you. In addition to tuition, 529 plans can help cover the cost of textbooks, room and board, and other curriculum-related supplies. These plans can now even be used to pay for private K-12 schools up to $10,000.00 a year per beneficiary.
Be aware of the penalties for unauthorized withdrawals.
It is important to remember that if the funds are used for anything other than an allowed item under the 529 plan, the withdrawal will be subject to a 10% penalty. However, most 529 plans allow you to change the beneficiary if necessary. This feature can be especially helpful for families with multiple children and can minimize the need to make an unauthorized withdrawal.
4) What are the benefits to working with a personal financial advisor when considering saving for college?
When thinking about your overall financial situation, it can be extremely helpful to have an advisor who can see the big picture.
- First and foremost, a financial advisor can help you define clear savings and investing goals based on age, family size, and any currently held assets.
- Second, a financial advisor can ensure that individual accounts are invested in portfolios that reflect your personal risk tolerance and time horizon. In other words, they can help determine how money should be invested to best meet your short and long term goals.
- Third, a financial advisor can play an important role in overall college planning. This type of preparation includes estimating the cost of college for your child based on age, as well as the type of institution being considered for attendance.
Robin Mitler is a partner of New Potomac Partners, LLC a boutique Money Management firm located in Bethesda, Maryland. If you have any questions about college planning or any other personal finance questions, please feel free to email Robin at [email protected]