Saving for College: What, Why, When, Where, and How

If it’s important to you that your children attend college, the time to start saving is now. The real question is where to place your savings.

If you start saving early in your child’s life, you can afford to take a riskier approach in the initial years. The closer you get to needing the money, however, the less acceptable risk becomes. For example, a sharp downturn in the stock market right when you need money can be devastating if your investments are in market-sensitive securities.

Regardless of which savings vehicles you use, it’s key that you stay connected to your investments. Handing them over to a financial advisor blindly is usually not in your best interest. Understanding and participating in your own investment decisions almost always makes more sense.

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

The “529 Plan” and the Wealth Creation Trust.

The 529 Plan is the most common way to save for college. This college savings opportunity 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529 Plan is not used for college, however, a 10% penalty is assessed on the earnings (though the principal may still be withdrawn tax free).

The Wealth Creation Trust on the other hand, 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 events, birthdays and other rites of passage. The funds in the Trust are then held for the benefit of your child, who can eventually become a Trustee of the Trust and learn to manage the assets when she hits a level of maturity you determine to be appropriate.

Funds in a Wealth Creation Trust can be used not only for education, but to start a business, travel the world, purchase a home, or for any other purpose you determine.

Sometimes when contemplating how to pay for college, parents are tempted to tap into money that has been set aside 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 Retirement funds withdrawn to pay college expenses must be reported on the Free Application for Federal Student Aid as additional income.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 their 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.

One of my favorite things about being a personal family attorney is building lifetime relationships with my clients. I am able to serve as a resource for them as they navigate the same challenges I face in life — and yes, saving for my kids’ college is a big one! If that’s the kind of relationship you’d like to have with your lawyer, give us a call and schedule a Family Estate Planning Session with me. We’ll look at your unique family situation, goals, and challenges. If things aren’t quite where you want them to be we’ll look at strategies, tools, and techniques to help get you there.

Dedicated to your family’s wealth, health, and happiness,