Another school year is drawing to a close. If you have young children, you might be planning their summer activities.
But you might want to look even farther into the future — to the day when your kids say goodbye to local schools and hello to college dormitories.
When that day arrives, will you be financially prepared?
For the 2013–2014 academic year, the average cost — tuition, fees, room and board — was $18,391 for an in-state student at a four-year public college or university, and $40,917 for a private school, according to the College Board.
These costs may be considerably higher when your children enter college.
Of course, these are just the “sticker” prices; some families pay less, thanks to grants and tax benefits, such as the American Opportunity Tax Credit and the Lifetime Learning Tax Credit.
College is still a good investment in your child’s future. Over an adult’s working life, an individual with a bachelor’s degree can expect to earn, on average, nearly $1 million more than someone with just a high school diploma, according to the U.S. Census Bureau.
Unfortunately, you may not be saving enough — or you might not be making the most of your savings.
More parents use a general savings account than any other method, according to Sallie Mae’s "How America Saves for College" 2014 study. However, these types of accounts typically earn tiny returns with no tax advantages.
On the other hand, attractive college-funding vehicles include a 529 plan; earnings accumulate tax free, provided they are used for qualified higher education expenses. (529 plan distributions not used for qualified expenses may be subject to federal and state income tax and a 10 percent IRS penalty.) Furthermore, your 529 plan contributions may be deductible from your state taxes. But 529 plans vary, so check with your tax advisor regarding deductibility.
A 529 plan offers other benefits. For one thing, lifetime contribution limits for 529 plans are generous; they vary by state, but some plans allow contributions exceeding $200,000. And a 529 plan is flexible: If your child decides against college or vocational school, you can transfer unused funds to another family member, tax and penalty free.
While a 529 plan is a popular choice for college savings, it is not the only option. You also might want to consider a Coverdell Education Savings Account, which, like a 529 plan, can generate tax-free earnings if the money is used for higher education expenses.
Typically, you can put in a maximum of $2,000 per year to a Coverdell account, but it offers more flexibility in investment choices than a 529 plan.
Your children may be young, but before you know it, they’ll be packing their bags for college. So, no matter which college savings vehicles you choose, put them to work soon.