BY STEVEN GALLO, CFP®, PARTNER, FINANCIAL ADVISOR
It’s no secret that college is one of the major expenses most folks will face. In a 2020 report titled, Trends in College Pricing and Student Aid, the College Board indicated the average annual in-state cost of attending a four-year public college came to $26,820. For out-of-state students the average cost came to $43,280, $54,800 for those students attending a private university. As a parent with a child not too far off from college, these numbers certainly got my attention.
One universal truth of all long-term saving goals would be – the earlier you start, the better – and saving for college is no different. We talk about the importance of putting money away for retirement as soon as possible. That’s because time plays a major role when it comes to compound growth. If you put money away as soon as your child is born, you have almost 20 years of growth potential—and you don’t have to invest as much each month as you pursue your goal. There are many different types of accounts you can utilize as you save for college. Here is a list of the types of accounts we use with our clients at Marzano Capital Group.
- 529 plans: These state-sponsored plans allow parents to put their savings in an investment account with their child as beneficiary. As the owner of the account — named for the IRS code section that created it — the parent does not pay income taxes on earnings. If the kid doesn’t go to college, parents can transfer the amount in the account to another family member. Moreover, parents do not have to pay federal income taxes when withdrawing money as long as the cash is earmarked for college expenses, such as tuition and books.
- Coverdell Education Accounts — Coverdell Education Savings Accounts work similar to 529 plans, offering tax-free investment growth and tax-free withdrawals for qualified educational expenses. However, the maximum annual contribution to Coverdell ESA is $2,000 and there are annual income restrictions limiting parents who can contribute.
- Roth IRA: Using a Roth IRA to save for college gives you flexibility and offers a number of advantages. For example, if you withdraw your Roth IRA contributions early for college expenses, you won’t be taxed or penalized. You can also leave your earnings in a Roth for retirement, while withdrawing the principal to pay for the cost of education. In addition, if college is not a fit for your child, or their education is paid for by other means, like a scholarship, you can simply keep the money in your Roth IRA for your own retirement.
- Investment Account: An account for long-term savings looking to achieve a higher return in exchange for taking on more risk. Typical investments include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). You will pay taxes on your investments as you realize gains and income from dividends and interest. However, if you don’t use all the funds for college expenses you can reallocate them to other longer-term goals like retirement.
College costs are projected to continue to increase. The best time to start savings toward any longer-term goal is early and the next best time to start is today. Whether you use one of the above accounts or a mix of them, the key is to get started. If you would like help determining your best college saving strategy or any long-term savings plan, check us out at www.marzanocapitalgroup.com.
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.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. All investing involves risk including loss of principal.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Independent Advisor Alliance and Marzano Capital Group are separate entities from LPL Financial.
 Source: College Board, https://research.collegeboard.org/trends/college-pricing