College Planning Basics

In this video, we’re going to share with you everything that you need to know about college planning. So a common topic that often comes up in meetings is college planning. Very stressful sometimes for clients to juggle daycare costs, nanny and everything else that comes along with having a kid.

So we thought it would be helpful to map out the cost just so that you have an idea from day one of what to expect. So what we have here is just public and private costs. So today the average cost for a public school is about 29,000, and private is 46.

This includes tuition and room and board, just a national average across the board. So assuming a 5% inflation and cost for public in ten years, we estimate that a college that costs $29,000 today would cost closer to 47,000 in ten years, and in 15 years, it would be 60,000.

So if we just walk through a quick example here. If we just split the public and private down the middle at $40,000 today, if we have a one year old that was just born, you would need a total of $350,000 to fully fund undergrad for the child.

So saving $800 a month would get this goal fully on track. And then in a separate example, say you have a ten year old, since that college goal is closer for that child, there’s less inflation on the cost.

So four year cost for the ten year old would be 250,000, and you would need to save about 1800 per month to get that fully on track. So, very relevant today. There’s a lot of talk in the political spectrum about maybe college will be free in the future.

Just candidly, if you’re a client of Ewa, we feel that you will be excluded from this. More than likely this would be means tested or income tested. So very important, even though little bit of sticker shock with the 350, very important to start planning for that today.

And now Jameson is going to walk through our philosophy and what we would recommend to do to fund college. So we think of what are vehicles out there that you’re able to save into that are accessible when your kids ready to go of school.

There’s really two main options that we want to look at. The first one would be a 529 plan. The second would be just a taxable flexible investment account. So the 529 plan, depending on what state you’re in, there could be a little bit of a state tax deduction when you put the money in.

The benefit of that is that it grows tax free. All the growth is tax free and it distributes tax free if used for education. So one of the most tax efficient vehicle that we could use for education costs, second vehicle would be an investment account.

So any of the growth would be taxable. The strategy that we like to use is anything in the taxable account should be invested into equities or things that are going to grow over time. The reason being you’re subject to capital gains tax in the investment account.

Anything in the 529 plan, that would be where we could hold fixed income, because any of the interest that’s kicked off, you’re not paying any capital gains. And that money also has to be distributed for college.

It can’t be used to pay off loans. So that would be the money that we would want to tap into first at the time of education. Firm philosophy is we want to put half of savings into 529 plan, half into a flexible investment account.

And here’s a breakdown of the numbers. If we were to invest $200,000 into a 529 plan, and that 200,000 grew to 400,000, if that’s used for college, all 400,000 is distributed tax free. The downside, if it’s not used for college, you have to pay a 10% penalty to access it and you pay capital gains on any of the growth.

Any of the interest or dividend that’s kicked off would be subject to 3.7% state tax and then a 37% federal tax. If that’s held in the 529 plan, all of the interest is tax free as long as it’s used for education.

So just a few other quick facts about 529 plans. They are creditor protected. So if you’re a physician or a business owner, if you were to get sued, obviously consult with your attorney and legal team first.

But the 529 plans would be off the table and those would be safe in the event of a lawsuit. As far as contribution limits, you can contribute 15,000 per child per spouse. So 30,000 per child, that is completely tax free, meaning it doesn’t work against your lifetime gift credit.

And then you can also do accelerated gifting. So they allow for up to five years worth of contributions at once. And this is for each spouse. So for one kid, one spouse could do 75,000 and then the other spouse could also do 75,000.

So total of 150 going into the 529 plan today. Reason that would be beneficial is the sooner the money gets in, the sooner it can grow. So if we get the money in today, larger amount is going in and that can begin compounding and growing and working towards the education goal.

One of the questions that we hear all the time is what happens if my kid doesn’t need the money that’s in the 529 plan for education? That money, let’s say you have three kids, the oldest kid doesn’t go to college, that money can then be passed to kid number two.

Say kid number two doesn’t go to college, it could be passed to the third kid, and then it could also be passed on to, once your kids get older, their kids kids. So it could be gifted to grandkids if none of that money was used for education at that time.

One thing we want to be aware of when we’re doing education planning and funding five to nine plans is being cognizant of what state you’re in. An example is the state of Pennsylvania allows for out of state.

529 plan funding. And the state of Pennsylvania has a 3.7% state tax deduction on money that’s funded in each year. Whereas a state like Virginia or Maryland, for example, if you used an out of state plan, you wouldn’t be able to get the state tax deduction.

So for those states, we would just want to be aware of what the state rules are and make sure that we’re utilizing the state plans rather than an outside 529 plan to take advantage of the tax deduction.

Another common question that we get from clients is can one beneficiary have more than 1529 plan? The answer to that is yes. So for example, you as a parent could open a 529 for your child. A grandparent could have one as well.

Aunts and uncles really no limit to that, just to spread out the tax deduction if that’s something that’s applicable in your case. So this is our philosophy right now. But one thing that we’ll be aware of is if tax laws change and for example, if you’re a high income earner, let’s say you’re in the top tax bracket, one of the proposals that’s been on the table is merging the capital gains rate with marginal tax rates.

So money in the taxable account, let’s say it’s 25% capital gain rate that could be merged and any of those gains you would pay a 37% tax on. If that legislation changes, we would then shift our recommendation to have more this number might go more towards 75% into a 529 plan just to take advantage of the tax deferral because the capital growth would be taxed at a much higher rate.

So that was a lot of info and a lot of numbers. If there’s any questions that we didn’t answer that are specific to your situation, feel free to reach out and we would be more than happy to have a conversation about it.