Funding Your Child’s Future: Education Savings Options
For today’s parents, planning for your child’s college years often begins long before your student starts filling out college applications. Rising college costs require most families to save for their children’s post-secondary education, and the earlier you begin the better.
Depending on a variety of factors, including the quality of your local schools and your child’s interest and aspirations for higher education, your child’s college prep may also include attending private elementary and secondary schools. Fortunately, there are many tax-advantaged ways to save for your children’s schooling and ensure that your dedicated education funds go a long way.
College costs have been on a steady rise for more than a decade. According to the College Board, annual tuition and room and board at an in-state, public, four-year school averaged $19,548 for the 2015-2016 school year. For a private, four-year school, the average cost was $43,921.1
Setting aside funds for your child’s college can become challenging when you’re simultaneously paying for private, K-12 education. Tuition for private, K-12 school averages $13,640 per year, according to the most recent statistics from the Council for Private American Education.2 But, the price tags can vary widely, depending on which city you choose to call home. In New York City for example, a handful of elite, private high schools charge more for one year of tuition than some Ivy League schools.
If private elementary and secondary schools are part of your student’s path, be sure to create an accurate budget that reflects the unanticipated costs as well as savings. For example, you may need to pay for tutors to help your child prepare for private high school application exams or keep up with courses. However, school uniforms may actually save your family money spent on trendy, teen wardrobes.
Comparing Savings Vehicles
Finding tax-efficient ways to save for your child’s primary, secondary and college education costs may help your dollar go that much further. There are several education savings vehicles to consider, and depending on your financial needs and circumstances, one may make more sense than the others.
These plans are great for saving for college and other types of post-secondary education. The earnings in these plans grow tax-free and you can then make tax-free withdrawals to pay for qualified college expenses. The account owner controls the funds (not the beneficiary), and the contribution limits are high–typically between $200,000 to $500,000 depending on the plan you choose. But consider…You cannot use 529 funds for K-12 expenses and you’ll pay a 10% penalty plus taxes on any money withdrawn for purposes other than qualified college expenses. The penalty is only on the earnings portion of the withdrawal. The 10% penalty is waived with death, disability, and scholarship (of the beneficiary).
These custodial accounts created under UTMA and UGMA can be used to save for K-12 and college expenses. You can gift money to an account, which is owned by your child. The account’s earnings are taxed at the child’s rate, which is typically lower than your own. There are no limits to the amount you, family members and friends can contribute to the account. You can also withdraw the funds at any time, as long as they’re being used for the benefit of your child. But consider… Once your child reaches the age of majority, usually 18 to 21, though it varies by state, the money in the account belongs to him or her. As a parent, you have no legal control over how the money is spent. This is an important consideration if you’re concerned about your child’s ability to preserve the funds for educational use.
Coverdell Educational Savings Accounts
These plans cover K-12 and college expenses. Like 529 plans, earnings and distributions are tax free as long as the money is used for qualified educational purposes. But consider…These accounts are only available to individuals earning a modified gross adjusted income of $110,000 ($220,000 for joint filers) or less per year. The max contribution is $2,000 annually, and the funds must be spent on education before the account beneficiary turns 30–otherwise you face taxes and penalties.
Education is one of the greatest gifts you can give a child. Leverage the savings vehicles available to help finance up front education costs and make your child’s school dreams come true.
Deborah Tryon is a financial advisor with the Dewing-Tryon Group at Morgan Stanley in Palm Desert and can be reached at (760) 776.6227. CA license 0H8751.
References: 1) Trend in College Pricing 2015, Accessed May 2016: http://trends.collegeboard.org/sites/default/files/2015-trends-college-pricing-final-508.pdf 2) Council for American Private Education Facts and Studies, Accessed May 2016: http://www.capenet.org/facts.html
An investor should consider the investment objectives, risks, and charges and expenses associated with 529 plans and municipal fund securities before investing. More information about municipal fund securities is available in the issuer’s official statement – the 529 Plan Program Disclosure – which is available from your Financial Advisor. It should be read carefully before investing. Investors should consider many factors before deciding which 529 plan is appropriate. Some of these factors include: the Plan’s investment options and the historical investment performance of these options, the Plan’s flexibility and features, the reputation and expertise of the Plan’s investment manager, Plan contribution limits and the federal and state tax benefits associated with an investment in the Plan. Some states, for example, offer favorable tax treatment and other benefits to their residents only if they invest in the state’s own Qualified Tuition Program. Investors should determine their home state’s tax treatment of 529 plans when considering whether to choose an in-state or out-of-state plan. Investors should consult with their tax or legal advisor before investing in any 529 Plan or contact their state tax division for more information. Morgan Stanley Smith Barney LLC does not provide tax and/or legal advice. If you’d like to learn more, Please contact Deborah Tryon. The author(s) and/or publication are neither employees of nor affiliated with Morgan Stanley Smith Barney LLC (“Morgan Stanley”). By providing this third party publication, we are not implying an affiliation, sponsorship, endorsement, approval, investigation, verification or monitoring by Morgan Stanley of any information contained in the publication.The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned. Deborah Tryon may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where [he/she] is registered or excluded or exempted from registration, http://www.morganstanleyfa.com/dewing_tryon. © 2016 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 1524300 06/16