My Wish...

Carolanne M. Chavanne CFP

In the song My Wish, Rascal Flatts gives voice to the thoughts many parents have this time of year when watching a child heading off to that first day of school: “But more than anything, my wish, for you, is that this life becomes all that you want it to. Your dreams stay big, your worries stay small, you never need to carry more than you can hold. And while you're out there getting where you're getting to, I hope you know somebody loves you and wants the same things too.” For parents of college-bound children, there is a feeling of pride in what their child has accomplished to get to this point, tempered by a mix of concerns: Is he/she ready to be on their own? As parents, do we have the financial ability to send them away to school?

A recent survey disclosed that 73 percent of parents say paying for college is their number one financial concern1.  That shouldn’t come as a surprise considering that, in the last twenty years, in-state tuition and fees at public universities have increased by 212%2.  Student loan debt is now the second-largest single asset of the U.S. government, second only to checkable deposits and currency3. Unfortunately, in many cases, that debt carries forward for years past college and has a significant impact on many young people as they start their careers and families.  In fact, thirty-eight percent of all federal student debt is held by people age 35-49, with another 21 percent held by people age 50 and older4.  Having a solid financial plan in place to address these costs is a vital consideration when planning for your child’s education.

What is the best way to pay for college?

Education planning helps to ensure that your children, or grandchildren, will have the funds available to provide for higher education expenses. For people starting a college savings plan today, questions inevitably arise as to the best way to save for such an important and long-term goal. Certainly, there are many factors to consider when selecting a college savings plan strategy, including time horizon, risk tolerance, investment preferences, and your tax situation.

It’s important to remember that with many of these savings plans, the funds do not have to be used specifically for college.  They can be used for high school, trade, or vocational schools and related expenses or applied to advanced education. They can even be transferred to future generations.  This provides a great deal of flexibility for what is often an unclear path forward. The most important goal is to have the funds available and to start saving early, so the funds have time to grow with your child.

One key consideration is who will actually own the college funds, as that decision is likely to play a significant role in the availability of financial aid when the time comes (see Financial Aid section). There are several options to consider when researching education funding planning, and Prosperity Wealth Planning is ready to help determine which option works best for you and your family. Click here to schedule an appointment to discuss which options are best for you.

Traditional Savings or Investment Accounts

College savers can opt for any of the more traditional methods of accumulating college funds: Savings accounts (CDs, money market funds); Tax-free municipal bonds; U.S. Treasury securities; or Mutual Funds.  If the time horizon is long, savers may be better off selecting higher-risk vehicles that offer potentially higher returns. As the time horizon shortens, the strategy would then be to gradually move funds into more conservative investments.

529 Plans

529 plans are designed to help a family cover the cost of college by taking advantage of incentives offered through federal and state tax codes.  The plans vary between individual states and the educational institutions that offer them. Contributions are not tax-deductible; however, the earnings are not subject to current taxes. Also, if certain requirements are met, the distributions used to pay for qualified higher education expenses are not taxable.

There are two main types of 529 Plans:

  • Pre-paid tuition plan: this plan involves purchasing credits at participating educational institutions that can apply to tuition and, in some cases, living expenses. It’s important to keep in mind that participation in a prepaid tuition program does not guarantee a child will be accepted into a university or school.

  • College savings plan: this plan (the more popular of the two) establishes an account for a student that can be used to pay eligible college expenses. Many 529 College Savings Plans offer a choice of investments, including mutual funds, money market funds, and age-based funds.

529 college savings plans can also act as powerful estate planning tools. Under the rules that uniquely govern them, a lump-sum contribution can be made to a 529 plan in an amount up to five times the annual IRS-allowed gifting limit of $15,000. This means that you can gift $75,000 per recipient ($150,000 per recipient for married couples), as long as you denote your five-year gift on your federal tax return and do not make any more gifts to the same recipient during that five-year period. After five years, you can elect to give another lump sum.  Many clients consider this to be a powerful way to fund a child’s (or grandchild’s) education, offering a lasting impact and legacy to future generations.

Custodial Accounts

Although custodial (UGMA and UTMA) accounts are not designed specifically for college savings, they do offer several advantages, including multiple investment options, tax benefits, and the ability for a parent to transfer assets to a child without needing to establish a more costly trust. One important factor to consider is that contributions to these accounts are irrevocable, and parents lose control of the funds when the child becomes 18 - 21, an age that varies by state. However, custodial accounts can be used for any expenses related to your child, not just college costs, and may be an additional resource to help you in your education planning.

Roth IRAs

A Roth IRA is a tax-advantaged retirement account to which anyone with earned income (up to a certain threshold) can contribute.  When funds are withdrawn from a Roth, they can be used to pay for any expense, including college expenses for a child or other beneficiary. There are no restrictions against using these funds for college expenses.

Note that, for a Roth IRA, withdrawing earnings before you reach age 59 1/2 in most circumstances incurs a 10% early withdrawal penalty, as well as tax on the earnings. However, if those early withdrawals are used for qualified education expenses, the penalty is waived (but you will have to pay income tax on the earnings).

Financial Aid

In the course of setting up any college savings strategy, special consideration should be given to future eligibility for financial aid.  Most needs-based financial aid programs determine eligibility on the amount of the assets that are owned by the child. As a rule, assets that are owned by the parents are not specifically considered in the determination of financial aid eligibility.  If assets are held in the child’s name or in a trust for the child, they could negatively impact eligibility.

Working together, we can examine college investment options to build a customized portfolio that takes into consideration your financial goals, risk tolerance, and timeline. Contact us today to find out more.

*Dynamic Wealth Advisors and Prosperity Wealth Planning do not provide tax or legal advice. To the extent that this material concerns tax matters, it is not intended to be used by a taxpayer as tax advice.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

New and Upcoming Events:

Administrative Change

As you are likely aware, it has been a long-time dream of mine to establish my own stand-alone Financial Planning firm to serve my clients. I am excited to announce that Prosperity Wealth Planning is now a stand-alone Registered Investment Advisor (RIA) with the Securities and Exchange Commission. This change does not impact in any way the manner in which your portfolio is managed. To facilitate this change, we have built a team to support all service and advisory needs for clients and I will continue to be your primary point of contact.

All paperwork associated with this change needs to be completed by September 30, 2021. You will be receiving an email with the link in the next several days. Once you receive the email, please let us know if we can help you with completing the forms digitally.

Client Appreciation Events

Just a friendly reminder that Client Appreciation Events are coming soon, and we are very much looking forward to seeing you there! 

October 14, 2021 - III Forks Restaurant - Frisco, Texas
For those clients in Texas, invitations are being sent, so please be sure to RSVP at your earliest convenience. 

November 11, 2021 – Tin Roof Bistro – Manhattan Beach, California
Invitations coming soon!

Additional Dates

  • September 6 – Labor Day 
  • September 15 - Third Quarter 2021 Estimated Tax Payment Due
  • September 30 – Paperwork regarding the “Administrative Change” above needs to be completed
  • October 1 - FAFSA Open Date
  • October 11 – Extended Individual Tax Returns Due
  • October 15 – Medicare Open Enrollment
  • October 31 – Halloween

Financial Planning Articles of Interest

 Back to School: 5 College Planning Mistakes to Avoid
Are Higher Ed Expenses Tax Deductible? A Quick Reminder for Parents
If You’re Applying for FAFSA, Is Your Paperwork in Order?

I hope that you and yours have had an enjoyable summer and are looking ahead to the coming season of back-to-school, football, and the upcoming holidays. We always look forward to your feedback and encourage you to let us know if there are any topics you would like to see addressed in future editions. Thanks again for your trust and friendship.





By Carolanne M. Chavanne CFP

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