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There are many things to figure out after the addition of a new family member, like setting up a nursery, picking a name, and finding quality daycare. While attending to so many details, planning for college can fall to the bottom of the list.

When it comes to college savings and where to start, first things first: Start with the right account.

Pick the Account

There are many ways to go about saving for college. Nine times out of ten, when clients approach us to start saving for college, we encourage them to explore a 529 College Savings Plan.

What makes a 529 College Savings account stand out against the competition is its triple tax advantage when the proceeds are used for higher education expenses. In certain states, a portion of the contributions can be deducted on state income taxes, growth in the account is tax-deferred, and distributions are tax-free if used for qualified education expenses.

Define the Goal

Once the account has been identified, the next item on the list is to define what “college tuition help” looks like. Some questions to consider:

  • Is the intention to cover 100% of college expenses or a portion?
  • Are you saving for undergrad, graduate school, a master’s degree?
  • What type of school would you like your child to attend? Some options are in-state public, out-of-state public, and private.
  • How much can you realistically save each month?
  • Are grandparents willing to help?
  • What if you have more than one child? Will you keep things equitable?

These are all very important questions to think about. With this information in hand, you can start looking up the cost of tuition and calculate annual savings targets. There are some great college calculators online or you could reach out to your financial advisor to run some projections.

Start a Funding Plan

Once you’ve run the numbers and recovered from the shock of how much college will cost for your little one, it’s time to put a funding plan in place. There are a few methods to consider based on your financial situation.

The most common funding approach is setting up monthly contributions. If the target is to save $6,000 per year, set up monthly contributions at $500. With this method, you are dollar cost averaging into the account over the course of a year.

For households that receive an annual bonus or have access to executive compensation models like Restricted Stock Units, an annual funding approach might be best. Each year, when the bonus is paid or the RSUs vest, use a portion of those units to fund the 529 account for the year. The earlier in the year, the more time those funds have in the market.

This final approach is often used by grandparents funding a grandchild’s 529 or a household that is sitting on a nice windfall from recent years. This is the front-loading approach where the account owner will invest five years’ worth of gifts in one year. The current annual gift limit is $15,000 for 2021, which means a grandparent, or cash rich parent, could make a one-time contribution of $75,000 and not need to fill out a gift tax return that year. This one-time contribution precludes you from making any additional contributions for the next five years and means the funds are at work in the market rather than sitting in the estate of the account holder.

Maureen D. Wright Maureen D. Wright Financial Advisor

Maureen has been involved in the financial services industry since 2013. She graduated summa cum laude from Illinois State University.

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