With today’s budget-busting college bills, parents need to make sure their college savings go as far as possible.
One of the easiest ways to do that is to save the right way for higher education expenses.
Saving for college needn’t be difficult, but we see so many parents going about it all the wrong way.
If you save using the wrong type of accounts, you could be losing almost half of your college account earnings each year to taxes.
Clients hear us say over and over again that for most people, the best way to save for college is to use a 529 college savings plan.
If you invest for college outside of a 529 or other tax-advantaged plan, earnings are normally taxed to you – the parent – each and every year until your child reaches age 24.
With today’s steeper tax rates and the extra investment tax for higher-earners, those taxes can eat up almost one-half of your account earnings each year. (High income taxpayers can now lose 43.4% of earnings to federal taxes, plus even more if they’re in a high tax state like New York, Maryland, or Pennsylvania).
That’s why it’s usually best to avoid saving for college using outmoded UTMA or UGMA minor’s savings accounts, bank accounts or CDs, or accounts held jointly with a parent. Those made sense twenty or so years ago, but much better options – like 529 accounts – are available today.
Think of it this way. It’s like driving around with one of those briefcase-sized mobile phones in your car from the early 90s. Even if those doorstops still work, it’s more convenient and cost-effective to switch to a sleek and powerful new model.
The Takeaway: Today’s 529 college savings plans make saving for college a snap, and can save enough on taxes to make your money go twice as far. There are many great 529 plans available, and some even offer state tax benefits for people living in high tax states. We love helping clients with their kids’ and grandkids’ college planning, so just ask!