As we approach the end of 2023, many of us are reevaluating our financial strategies, especially when it comes to saving for education. As a financial advisor and parent, I am often asked about the best way to save for college. Here are some frequently asked questions and my recommendations.
What is the best way to pay for college?
Broadly speaking, there are three ways to pay for college: current income, future income (student loans), and past income (savings).
The best approach for you will depend on your specific situation, but a balanced approach I often recommend is one that follows the 1/3 rule. With this approach, he saves 1/3 of his college costs upfront, pays another 1/3 from his income while in school, and the remaining 1/3 goes to scholarships, student income, or student income as needed. We aim to finance this with a loan.
When is the best time to start saving?
While it's easy to get distracted by the anxiety of looming college costs, I strongly encourage parents to first prioritize saving for retirement by setting aside 10-15% of their income. Once that's in place, the next step is saving for college.
If your budget doesn't quite accommodate college savings yet, that's okay. Savings isn't the only way to pay for college. For example, the Tennessee Promise Scholarship will cover her two years of tuition at a community college or technical school in Tennessee.
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Where should I save money for college?
Available in most states, 529 plans are a great way to save money on education costs. Provides tax-free growth and withdrawals for education expenses. Therefore, they should consider saving for college first. TNStars in Tennessee is a great option, but keep in mind that you are not limited to state plans. (Federal tax benefits are the same for all 529 plans – tax-free growth and withdrawals for qualified education expenses, but state tax benefits may vary. Some states offer their own 529 (Provides a tax credit or deduction for contributions made to the plan.)
Each state sets contribution limits for 529 plans, typically ranging from $300,000 to $500,000. This limit is the total amount you can contribute over the life of your plan. When it comes to withdrawals, there is a $10,000 annual limit for K-12 education expenses, but no annual withdrawal limit for college expenses.
How much should I contribute to a 529 plan?
For someone looking to save about a third of their child's college costs, a good goal is $170 a month, or about $2,000 a year. If you can save more, consider a regular brokerage account (other than a 529 account) for the excess. Balancing your 529 contributions is important. Excessive funding can lead to penalties for withdrawal for non-educational reasons (for example, if the child is not attending college or receiving a large scholarship).
If you currently have a lump sum available for 529 funds, the appropriate amount to add depends on whether you plan to use it for K-12 education and which colleges your child may attend. it's different.
Do you have other tips for saving for college?
For households with adjusted gross income of less than $218,000 (married couples filing jointly in 2023, singles filing $138,000), you must first make Roth IRA contributions to the maximum amount ($6,500 per person) before contributing to a 529 plan. USD) is recommended. Also, if your tax bracket is less than 32% ($364,000 jointly, $182,000 single), consider making Roth contributions in your 401(k) or 403(b). IRAs and 401(k)s can be used for college costs, but they don't have to be used. This means you can save the extra funds for your retirement.
Saving for college isn't easy, but it can be done. And often it starts with understanding your options and a simple plan. We hope you found these tips helpful. And we wish you the best on your college savings journey. If you have further questions, please contact your financial advisor. If you don't have one, CapWealth would be happy to help.
Hunter Yarbrough is a CPA, CFP, and vice president and financial advisor at CapWealth. He is passionate about looking at personal finance holistically, including investments, taxes, retirement, education, estate planning, and insurance. For more information about Hunter and his CapWealth, visit capwealthgroup.com.
