When your children are little it’s almost impossible to think about them heading off for college but it’s never too early to think about a savings plan for your child’s college education. For the freshman class of 2037, the cost of an in-state, four-year public university will run about $185,000 (accounting for a 4% increase annually). So if you have a freshman in high school or a little one starting preschool, now is the time to start saving in a college fund.
Deciding the best route for your child's future starts with knowing the financial options available. McHenry Savings Bank has compiled some recommendations to create and fund your college savings plan.
529 College Plans
Illinois is one of more than 30 states which offer a 529 college savings plan, sometimes referred to as the Qualified Tuition Program (QTP). With a 529, post-tax money is invested in the plan. Once your child starts college, you or your child are able to withdraw the funds, plus investment gains, tax-free to use for tuition, books, and any other qualified education expenses.
There are no income requirements to set up or contribute to a plan. The funds in an account only have a nominal effect on financial aid; a maximum of 5.64% of 529 counts toward the expected contribution. If you have $100,000 saved, your financial aid only takes a $5,640 hit. A 529 plan’s account beneficiary can also be transferred to another family member if the child receives a scholarship or doesn’t plan on using the money.
Fees and operating costs vary per state. Contribution limits also vary per state but are significantly higher compared to a Roth IRA. In Illinois, the tax benefit is $10,000 annually for single filers and $20,000 for joint filers. Additionally, these contributions often are considered gifts, and thus qualify for the gift tax exclusion ($15,000 in 2019).
Roth IRA
Similar to a 529 plan, post-tax money is contributed and can be withdrawn tax-free (plus any investment gains) once the owner turns 59-½. However, a Roth allows withdrawals (tax- and penalty-free) for qualifying educational expenses after five years. The benefit is that is if your child opts not to attend college, the funds can be used for retirement (or a down payment for a second home).
While a Roth IRA account won’t initially hurt your financial aid eligibility, withdrawing any funds will be applied to your income.
The Roth has greater income and contribution limits compared to the 529. The contribution limits are $6,000 annually ($7,000 if over age 50). Plus if you earn $129,000 single / $193,000 jointly, you are not eligible.
Prepaid College Tuition Plans
This plan is pretty self-explanatory: contribute to your child’s college tuition now while locking in 2019 prices. For example, if in-state tuition is currently $15,000, a $7,500 contribution will get you a semester’s worth of tuition. If the tuition cost is $30,000 when your child starts college, your initial $7,500 contribution will be worth the same 50% - or $15,000. This protects you from inevitable tuition hikes, especially if your child is in the freshman class of 2037.
Similar to a 529 plan, any financial gains from investments are usually exempt from federal taxes. The CollegeIllinois! Program is currently on hold, pending discussions with policymakers to help strengthen the program.
Now that you have set up a college savings plan (and recovered from sticker shock), it’s time to maximize your savings potential. Here are five things you can do to help you save what you need:
- Set up your checking account to automatically transfer funds into your college saving plan account.
- Invite family members and close family friends to contribute. A majority of 529 plans have ways to accept gifts, plus a contribution makes for a great birthday or holiday gift.
- Ask your employer if they match 529 plan contributions. (Note: only 1% of companies do, but it doesn’t hurt to ask).
- Periodically keep an eye on the account’s progress, but don’t overthink it. A simple strategy is to save one-third of the cost of tuition. Determine the amount by multiplying your child’s age by $3,000 for an in-state public school. For example, if your child is 10 you would need to save $30,000.
Visit McHenry Savings Bank today to learn how you can save for your child’s college or to speak with an expert please call 815-385-3000.
In addition, McHenry Savings Bank, through its wholly-owned subsidiary, McHenry County Investment Services Inc. (MCIS)1, provides options for our customers with investment and insurance needs, including college planning assistance. Our president, Richard Hedlund, is available to take appointments at any of the MSB locations to discuss your personal financial goals. Please call to make your appointment today at 815-331-6464.
1Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and MCIS, Inc. are not affiliated. Non-deposit investment products are not FDIC insured, not bank guaranteed and may lose value.
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