Now that this year's tax season is over and spring is in full swing, many parents' financial fancies turn to the costs of their kids' higher education. Therein lies a dilemma: You really should start saving for college costs as early as possible – think prenatal. But there are so many unknowns between birth and 20 years later. It's easy to get gridlocked in indecision:
- Will the costs of higher education continue to increase or level off in the coming years?
- What can you reasonably expect your investments to earn in after-tax returns?
- What sorts of scholarships, grants and loans can you expect?
- Will your two-year-old end up attending Harvard, a local trade school, or a state school?
The point is, it's okay to feel unsure about how best to save for higher education costs. It's not okay to skip it entirely, unless funding college costs isn't part of your family's goals. Even an imperfect savings plan is far better than none at all, so start (or keep) saving anyway, as early as you possibly can.
One option is to sock away after-tax dollars in a 529 plan where the money can grow tax-free; distributions are also Federal and sometimes state tax-free, as long as you spend them on qualified education expenses. You can select any state's plan that best suits your needs; it may or may not be the one offered by your home state.
That's a nice deal. But what if you don't spend your 529 plan savings on qualified education expenses after all? You'll typically end up paying taxes plus a penalty if you take the money back out for other purposes.
So, it also makes sense to not lock up too much of your money in a 529 or similar plan. As a middle-ground approach, you may decide to augment or even replace tax-sheltered college savings with saving in an ordinary (taxable) investment account. While you lose the potential tax benefits by doing so, you gain flexibility to later reallocate those funds elsewhere if your or your kids' college plans don't pan out as expected.
As you might imagine, there are a great many more details I could dive into to help you save for college. To get started, Savingforcollege.com is a great place to compare various states' 529 plans. It's also chock full of calculators, resources and additional insights on how to come as close as you can to planning for the unknowns. Lynn O'Shaughnessy's College Solution is another reputable source for tell-it-like-it-is college saving ideas.
If you'd like additional objective input, we're here for you. Or seek out a similarly structured fee-only fiduciary advisor who has no conflicting incentives to recommend one investment product over another. Whatever you do … if you're not yet saving for your kids' college and you're inclined to do so, make that your first and most important step of all.