Making the most of your savings strategy
Your goal is to save money for your children’s college education, but you have questions. For example: What are some strategies for your financial situation and what are your feelings about tax-favored options and potentially maximizing returns versus seeing modest but guaranteed returns.
In this section, we talk about the advantages of starting a savings plan as soon as you can instead of waiting , and three different investment strategies for saving for college.
It’s a basic financial tenet that establishing a regular savings plan is a good idea. Some people put it off until they feel their income can support a savings strategy. Others start a savings plan, but use traditional bank instruments like savings accounts and CDs that offer limited returns.
Generally, a better strategy is to begin saving as early as possible in an investment, like a mutual fund, that has the potential to deliver a healthier return.
For example, let’s look at what happens to the savings of two hypothetical people who each start saving for their children’s college, earn a return of 8%, and start withdrawing their money for their kids college at age 45. The difference is the “Smart Saver”, started saving 10 years before the “Late Saver”*.
$99,000
Smart Saver
Smart Saver starts saving $2,000 every year, starting at age 25, and saves until age 45 when her daughter is ready for college.
At an average rate of return of 8%, she has nearly $99,000 after investing only $40,000.
$88,000
Late Saver
Late Saver chooses to live life a little more fully and waits until he is 30 to start saving. He decides that since he is starting a little later but still needs the money at age 45, he will put away $3,000 a year.
At an average rate of return of 8%, he only has about $88,000 available when his son is ready for college, $11,000 less than Smart Saver after investing $5,000 more.
By deferring his savings program for five years, Late Saver never catches up to Smart Saver.
Late Saver saved $5,000 more, yet his account is worth 11% less than what Smart Saver has at age 45
– all because he waited five years to start saving.
*Any individuals used in scenarios are fictitious, and all numeric examples are hypothetical and are used for explanatory purposes only.
Is it time to get started?
You can’t go back in time and start saving at age 20 if you’re now 30. But starting to save now may give you significantly more money than waiting even one or two years. It’s never too late to start, and waiting may make it harder to achieve your financial objectives.
Let’s talk. We’ll help you design a savings plan that will help you maximize your savings and achieve your life’s financial goals. Call us or fill out this form to set up an appointment with one of our trained, experienced financial advisors.
Talk to us today: 208-898-7196
Three Ways to Save for College
Allegis Financial Partners generally recommends one of the following options when deciding on a savings plan for your children’s education. Each offers advantages in terms of tax savings, flexibility, access to your money, growth potential, and protection of your principle. Which one is best for your family? Talk to us. We can not only help you decide, but can help you set up the plan that works for you.
A 529 Plan
A 529 plan is a very simple, easy way to save for college. Sponsored by a state or educational institution, it enables families to set aside tax-deferred funds for future college costs. The federal government and thirty-three (33) states, including Idaho and Utah, offer their residents a full or partial tax deduction or credit for 529 plan contributions. There are no income limits, age limits, or minimum annual contribution limits. Contributions are not tax deductible on your federal return, however, earnings in a 529 plan grow free of federal taxes and are not taxed when the money is taken out to pay for college, and some states allow tax deductions on 529 contributions.
Most 529 plans offer a variety of different investment vehicles, including index funds, equity funds, bond funds, and money market funds. The funds you can choose from can be limited, so it may be best to consult with a financial advisor to potentially find the best one for your situation. We can help you explore those options.
You also have full control of where your money is invested. For example, you can live in one state and open a 529 plan in another state (ask us how this works). You can change your 529 plan investment options twice per calendar year. You can roll your funds over into another 529 plan once in a 12-month period. And most plans offer automatic monthly deposits from your bank account or through payroll deductions.
With few exceptions, the student has no legal rights to the funds in a 529 account so you’re assured the money will be used for its intended purpose. You can withdraw funds at any time for any reason. However, earnings withdrawn for any purpose other than paying for college may incur income taxes and a 10% penalty.
Mutual funds
While the tax advantages of mutual funds do not match those of a 529 account, mutual funds offer parents saving for college more flexibility, more growth potential, and more choice than a 529 account.
For example, if a situation occurs, like a financial opportunity or medical emergency, in which you need to access the money you originally intended to use for college, a mutual fund allows you to do so without tax penalty. Accessing the money in a 529 plan for a non-college related reason exposes you to a 10% penalty.
Any money in a mutual fund that’s left over when your child completes college is just money in your mutual fund. Free and clear. Any money that’s left over in your 529 account is subject to a 10% penalty as well as state and federal taxes.
A mutual fund allows you to choose from a wider variety of investment options than a 529 plan does. If you find a fund or a stock that’s earning more than your current plan, you can likely shift your money without penalty or incurring a tax hit. With a 529 plan, if the new fund is not part of a 529 plan, you’re choices of action may be more limited.
(Withdrawals from mutual funds may be subject to capital gains taxes. Please consult a tax professional.)
Whole life insurance policies
Over the long term, in addition to providing a death benefit, life insurance policies can act as a safe, cash accumulation vehicle. During its first few years, your returns will be minimal as the insurance provider amortizes the cost of insurance. After a few years, however, you’ll see a safe and reasonable rate of return. On the plus side, you’re assured that your money is growing and neither the principle nor your earnings will decline, no matter what the financial markets do. On the negative side, if the markets generate returns higher than the fixed rate on your policy, you may not see that additional cash.
Whole life insurance policies may provide greater flexibility with your money. You can use the principle and the earnings for other purposes besides college without penalty or additional taxes. Nor will they skew your qualifications for financial aid, an important consideration for many families. However, certain rules apply for how you take that money out in order for it be sheltered when applying for student loans and other assistance programs. We’ll show you how to take advantage of them.
Let’s talk. We’ll help you design a savings plan that will maximize the money your children have available for college while minimizing the impact on your taxes. Call us to set up an appointment with one of our trained, experienced financial advisors.
Call us today: 208-898-7196.