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Wednesday, June 29, 2022

Your Money: 6 Tips for Getting Started with College Savings

According to the College Board, college costs have been rising at the rate of inflation for more than a decade, but there is some indication that annual growth is waning. Its Trends in College Pricing and Student Aid 2021 survey showed an average increase of 1.6% in total year-over-year (sticker) tuition and fees at full-time, undergraduate public four-year in-state schools (up to $10,750 before inflation). registered. , and a 2.1% increase in private four-year colleges and universities (up to $38,070 before inflation).

Is college worth it?

As the cost of college continues to rise, more students and families are asking if college is worth it. According to Collegeboard, a non-profit organization whose mission is to expand access to college, the typical four-year college graduate who enrolls at age 18 and graduates at age four may continue until age 33 for compensation. One can expect to earn substantial relative to high school graduates. To live out of the workforce for four years and to borrow full tuition (with all fees, books and supplies) without any grant aid. The expected high lifetime income actually starts rising after the age of 40.

Bruce Helmer and Peg Webb

Specifically, 74% of private nonprofit four-year college students, and 60% of public four-year college students complete their education within six years, according to 2011-12 Collegeboard statistics. Within both types of institutions, students with higher family incomes were more likely to complete a degree than lower-income peers with similar high school GPAs.

Paying for college is compared to buying a new or used car each year, but sticker shock can be minimized if you plan ahead. Here are six tips to help you get started:

Get your retirement in first order: Once you stop working, your kids will have access to more sources of college money, so make sure you’re right for your retirement before setting aside money for your kids’ or grandparents’ college. are on the way.

start early: Even small contributions can add up if you give them time to grow. Assuming an 8% average annual return, investing just $100 per month for 18 years could yield $48,000.

Consider a 529 savings plan for potential tax benefits: Although contributions are not deductible, earnings in a 529 plan grow federal tax-free, and qualified withdrawals are exempt from federal taxes (and more than 30 states offer full or partial tax benefits as well). Lifetime limits range from $235,000 to $550,000 per beneficiary, depending on the plan.

  • You, as the account owner, control how funds are invested and distributed over the life of the account. You can also change the beneficiary to any other eligible family member.
  • You can open a 529 no matter how much you earn or the age of the beneficiary, which makes them an especially attractive vehicle for grandparents who want to reduce the value of their taxable assets.
  • The account owner can withdraw funds at any time for any reason, but be aware that the proceeds of non-qualified withdrawals will attract income tax and an additional 10% penalty.
  • In 2022, you can elect to make a 529 plan contribution of between $16,000 and $80,000 per individual beneficiary as if it were done over a five-year calendar-year period to qualify for the annual gift tax exclusion. (However, you need to be aware of how these contributions will affect your gift- and generation-skip limits in the same tax year.)

Custodial accounts give the child more control over money: Gifting assets through Uniform Gifts to Minors Act (UGMA) accounts or transferring assets through Uniform Transfer to Minors Act (UTMA) accounts can be a practical way to expand the universe of investment options available, but They come with a caveat. UGMA and UTMA accounts place more weight on financial aid decisions because they are considered the property of the child, not the parent. Also, their tax benefits are limited compared to 529s, and the use of these funds for tuition at K-12 schools is limited to $10,000. However, the biggest consideration is that the money saved goes to the child at a certain age (18 or 21, depending on the state), even if they go to college.

Set up a Coverdell Education Savings Account for the simple needs of: Coverdell offers ESA tax benefits that are similar to a 529 plan, but limits contributions from all sources combined to $2,000 per year. If you’re contributing less than $2,000 per year, they can be easy to set up and manage. Keep in mind that there are phased income restrictions when setting up an account and no inflation adjustments. In addition, the funds must be used until the age of 30.

Take advantage of federal tax breaks: Depending on your modified adjusted gross income, you may be able to take the “American Opportunity Tax Credit and Lifetime Learning Credit” for the first four years you pay tuition for higher education. You can receive a maximum credit of $2,500 per student, and 40% of the credit balance (up to $1,000) can be refunded to you if the credit zeros out the amount of tax you owe.

Need more information about college affordability? Contact your financial advisor or visit the Collegeboard website.

The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Bruce Helmer and Peg Webb are financial advisors at Wealth Enhancement Group and co-hosts “Your Money” on Sunday Mornings on KLKS 100.1 FM. Email Bruce and Pegg at yourmoney@wealthenhancement.com. Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a Registered Investment Advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.

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