Part 1 of 2 {New Year’s Resolution: Start Saving for College!}

$81,000. That’s the projected average cost of 4 years of tuition and fees for a UW institution in 2034.  WOWZA.   And, you now how we say, “time goes by so fast.” Or, “Before you know it, they are all grown up.” It’s true. And, even more reason to start saving for college TODAY!

What are my options?

I am only going to talk about 2…the 529 and Roth IRA.  I had the opportunity to pick the brain of Karen DeBaker, an Edward Jones financial advisor and below were my biggest takeaways.

The 411 on the 529

There are a lot of PROS to the 529:

• No contribution limits based on your income.
• Contributions up to $14,000 per year, per child qualifies for the gift tax exclusion.
• As long as the account is used for appropriate education expenses, earnings accumulate tax free.
• Just because you live in Wisconsin, doesn’t mean you have to invest in Wisconsin’s plan.  Do your research or discuss with your financial advisor to see what makes the most sense for you.
• However, if you do invest in the Wisconsin 529 plan contributions are eligible for a state tax deduction.  This August 2016 article from The Balance offers more insight.
• Not strictly for 4 year colleges.  529s can be applied to technical schools and trade programs.
• 529s can be switched between children.  For example, “John” decides to enter the workforce, but his younger brother “Tom” plans on pursuing higher education.  John’s 529 can be transferred to Tom.

There are also a few drawbacks of a 529:

• The money can only be applied towards applicable higher education expenses.  10% penalty on non-qualified withdrawals.
• The account may impact your financial aid eligibility (it’s considered an asset).
• Students must be enrolled at least part-time (6 credit hours/semester in 2017).

The IRS has a great Q&A section on their website regarding 529s.  Click here.

Now let’s talk about a Roth IRA.

PROS

• FLEXIBILITY. It doesn’t have to be used for higher education. We don’t have a crystal ball. Who knows if your newborn will take the path that leads to secondary education.  It can simply be transitioned to a retirement account if further education is not pursued.
• Contrary to the 529 Roth IRAs are not factored into the FAFSA.  Similar to retirement accounts, Roths are not considered an asset.
• You can withdraw your INITIAL investment amount at any time without any penalty.
• If your account is at least 5 years old, you can withdraw any earnings penalty free if they are applied to college expenses (note: If you are under 59.5 then you will still pay taxes on them).

CONS

1. Contribution limits.  Those under 50 can contribute a max of $5,500 year.
2. You must have earned income in the year you want to contribute to a Roth.  Given this, the account is initially set up in the parents’ names.  This may deter family members from making contributions.
3. In order to contribute the max amount, married couples must earn less than *$184,000 annually (*$117,00 for singles).   *2016 salary requirements.

So has this thoroughly confused you?  I hope not, but it’s a lot to digest.  529, Roth, or maybe a combo??  DeBaker suggests reaching out to a financial advisor to sort through the details and decide what’s best for you.  She added that many offer FREE initial consultations.

So, 2017 is here.  Don’t put off saving for college until 2018.  After all, they will be all grown up before you know it.

Part 2 we will explore creative ways to save for college.