This is the third of a series of five posts on personal finance.
In my last post, I talked about my conversation with a friend who was trying to get on track with saving for both her retirement and a family member’s college education.
My family has three boys who joined us as teenagers through the foster care system. When it came time to go to college, we were ill prepared because we did not have time to save enough. Every semester when the tuition bill comes due we cringe. Now we have grandchildren and a chance to plan better. Many families have situations like ours where several family members are participating in the raising and financial support of children.
“529 plans” are a great way to help save for future college expenses. They are tax-deferred savings for a child’s college education. These are different than Uniform Transfer to Minors Accounts because the money remains yours, in your control up until you start writing checks for college. If for any reason you decided to divert the funds to pay for another family member’s college education, you can do that as well.
You may be years away from drawing the money out, but be careful when you do, because it is only tax free as long as you use it for qualified expenses. Be sure to avoid 529 plan withdrawal traps.
As I mentioned in my earlier post, before you start saving for college expenses, it is good to have already chosen a financial adviser and to have started saving 10% of your income for your retirement.
You can now start talking about college expenses. Your adviser will help you take a stab at how much you have to save monthly based on college costs today, how much of those costs you plan to fund, and inflation. It’s a daunting exercise but important to tackle as early as possible.
In our planning, we chose to focus on the costs of a state school, because a private school was scary. We said if the kids get into private schools, maybe that would mean they got lots of scholarships!
Another thing to look at is rewards programs. Some merchants will add rewards to your 529 plan when you shop with them. There also are options for 529 plans that can lock in “tomorrow’s college tuition at today’s prices.” The options vary by state and sound interesting, but be aware that although you are locked into certain schools, you won’t necessarily get into them.
Given my family’s situation, I have not looked closely at these because I anticipate needing flexibility for schools that specialize in children with learning differences. There are similar programs for private colleges.
I know this is all general, but I hope you find it helpful and that it points you toward more information. Good luck in saving for your family’s future!
Please keep in mind I am not a licensed financial adviser, just a parent trying to plan for the future like many of you. The opinions expressed here are general in nature, and your unique situation may be different. Please review your individual situation with licensed tax and financial planning professionals.