College tuition is a major expense and with educational inflation, many parents are “wringing their hands” trying to figure how their kid’s higher education expenses are going to be paid for. At Compass Financial Services, we encourage parents to start planning for these expenses now! The sooner you start preparing, the better off you will be in the long run, and the less likely you’ll have to rely on additional funding resources such as student loans. But, what’s the best way to save money for your child’s college education? How much should you save for college? Our professional financial advisors are here to help answer your questions.
How to Start Saving For Your Kid’s Education
Thinking about how much you’ll need to pay for college tuition can be daunting, but those who start planning and saving early are usually in a good position to pay for higher education costs. Luckily, there are many ways to start saving money for your kid’s college, but one of the best ways is with a 529 college savings plan. While a savings or investment account offers great flexibility for parents or guardians looking to save for their kid’s college, neither come with the tax advantages of a 529 plan.
What is a 529 college savings plan?
A 529 college savings plan is an extremely flexible and specific type of savings investment for parents or guardians saving for their child’s college education. Many people come to us at Compass Financial with questions about 529 plans and whether or not they should open one for their child. 529 savings plans can be confusing, so to help, our financial advisors answer some of the most common questions we receive below:
- How will a 529 plan impact my taxes? A 529 college savings plan is state issued, so residents in the state of Iowa need to open an Iowa 529 and follow certain rules in order to deduct contributions from income taxes and claim the benefits.
- What if I get a scholarship - will it impact my 529 plan? If a scholarship is on the table, you can actually remove the exact amount of the scholarship you receive from your 529 college savings plan without a penalty!
- What if there’s money left over in a 529 college savings plan? 529 college savings plans are extremely flexible! If there’s money left over after you’ve paid all higher education expenses, you can change the name of the beneficiary to younger children (if you have them) or even someone you’re not related to that might benefit from your 529.
- What happens when you take money that’s not for qualified expenses out of a 529 plan? You will pay a 10% penalty on the amount you withdraw and the account owner will owe taxes on any investment gains in your 529 college savings plan.
- How do you prove your 529 plan is being used for education expenses? The owner of the account is in charge of all record keeping and will need to show that the investment is being used for educational purposes. Withdrawals need to match up with bills from the college or university, so be sure to keep these documents for a long period of time in case they’re needed in the future.
How much should you save for college?
The amount you need to save for college depends on a number of factors, including the type of school or university you go to, where it’s located (in-state or out-of-state), if you receive scholarships or financial aid and many more. According to a recent study by Melanie Hansons of EducationData.org, on average, students looking to attend a four-year university in the United States in 2021 will spend $35,720 per year. This cost has tripled in 20 years, with an annual growth rate of 6.8%. Visit EducationData.org to for more information about the average tuition in the United States for both in-state and out-of-state students attending 4-year college institutions.
Start Saving For Your Kid’s College - Compass Financial in Des Moines Can Help
At Compass Financial Services in Des Moines, we offer financial planning services to help parents/guardians and their children prepare for the oftentimes daunting expenses of a higher education. Contact our financial advisors today and get a complimentary initial consultation with one of our experienced advisors. We will work with you to create a customized plan that helps you pursue your financial goals. We look forward to working with you!
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.