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What are the best savings options for funding my child’s education?

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For today’s parents, planning for a child’s college years often begins long before the student starts filling out college applications. Depending on a variety of factors, your own child’s college prep may also include attending private elementary and secondary schools.

Fortunately, there are many tax advantaged ways to save for your children’s schooling and ensure that your dedicated education funds go a long way.

Contemplating Costs: Education costs have been on a steady rise for more than a decade. According to the College Board, annual tuition and room and board at an in-state, public, four-year school averaged $19,548 for the 2015—2016 school year. For a private, four-year school, the average cost was $43,921.1

Now, consider adding in the cost of private K–12 education, which averages $13,640 per year.2 That price tag can vary widely, as there are a handful of elite, private high schools that charge more for one year of tuition than some Ivy League schools do.
Comparing Savings Vehicles: Finding tax-efficient ways to save for your child’s primary, secondary and college education costs may help your dollar go that much further. There are several education—savings vehicles to consider, and depending on your financial needs and circumstances, one may make more sense than the others.

Finding tax-efficient ways to save for your child’s primary, secondary and college education costs may help your dollar go that much further.

529 Plans: These plans are great for saving for college and other types of post secondary education. The earnings in these plans grow tax-free, and you can then make tax-free withdrawals to pay for qualified college expenses. The account owner controls the funds (not the beneficiary), and the contributions limits are high—typically between $200,000 to $500,000, depending on the plan you choose. But, consider…you cannot use 529 funds for K–12 expenses, and you’ll pay a 10 percent penalty plus taxes on any money withdrawn for purposes other than qualified college expenses. The penalty is only on the earnings portion of the withdrawal, and can be waived due to death, disability or the receipt of a scholarship (of/by the beneficiary).

UTMA/UGMA: These custodial accounts created under UTMA and UGMA can be used to save for K–12 and college expenses. You can gift money to an account, which is owned by your child. The account’s earnings are taxed at the child’s rate, which is typically lower than your own. There are no limits to the amount you, family members and friends can contribute to the account, and withdrawals can be made at any time, as long as they’re being used for the benefit of your child. But, consider…once your child reaches the age of majority, usually 18 to 21, you have no legal control over how the money is spent. This is an important consideration if you’re concerned about your child’s ability to preserve the funds for educational use.

Coverdell Education Savings Accounts: These plans cover K–12 and college expenses. Like 529 plans, earnings and distributions are tax free as long as the money is used for qualified educational purposes. But, consider…these accounts are available only to individuals earning a modified adjusted gross income of $110,000 ($220,000 for joint filers) or less per year. The maximum contribution is $2,000 annually, and the funds must be spent on education before the account beneficiary turns 30—otherwise you face taxes and penalties.

Education is one of the greatest gifts you can give a child. Leverage the savings vehicles available to help finance up-front education costs and make your child’s school dreams a reality.

1 Trend in College Pricing 2015, accessed May 2016: http:// trends.collegeboard.org/sites/default/files/2015-trends- college-pricing-final-508.pdf
1 Council for American Private Education Facts and Studies, accessed May 2016: http://www.capenet.org/facts.html.

An investor should consider the investment objectives, risks and charges and expenses associated with 529 plans and municipal fund securities before investing. More information about municipal fund securities is available in the issuer’s official statement—the 529 Plan Program Disclosure—which is available from your Financial Advisor. It should be read carefully before investing. Investors should consider many factors before deciding which 529 Plan is appropriate. Some of these factors include: the Plan’s investment options and the historical investment performance of these options, the Plan’s flexibility and features, the reputation and expertise of the Plan’s investment manager, Plan contribution limits and the federal and state tax benefits associated with an investment in the Plan. Some states, for example, offer favorable tax treatment and other benefits to their residents only if they invest in the state’s own Qualified Tuition Program. Investors should determine their home state’s tax treatment of 529 Plans when considering whether to choose an in-state or out-of-state plan. Investors should consult with their tax or legal advisor before investing in any 529 Plan or contact their state tax division for more information. Morgan Stanley Smith Barney LLC does not provide tax and/or legal advice.

Jay Canell and Neil Canell are Financial Advisors with the Wealth Management division of Morgan Stanley in New York, NY. The views expressed herein are those of the authors and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, www. sipc.org. Morgan Stanley Financial Advisors engage Worth to feature this article. They may only transact business in states where they are registered or excluded or exempted from registration, [www.morganstanleyfa.com/canell.] Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where they are not registered or excluded or exempt from registration. The strategies and/or investments referenced may not be suitable for all investors.

This article was originally published in the October/November 2016 issue of Worth.

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