By Wesley Sebacher, CFP®, CAIA®
As a physician, you’ve dedicated a significant amount of time and resources toward your education and career. Now, you may be thinking about how to secure your children’s educational future. College and medical school tuition can be exorbitant, thus strategically saving for your children’s education is crucial. This guide is designed to help you navigate the complex landscape of education funding and savings, ensuring education goals set for your children are strategically fulfilled.
SET CLEAR EDUCATION GOALS AND START EARLY
The key to successful education funding is to first have a clear idea of the educational aspirations for your children, whether it is a college education, vocational training, or other pursuits. These goals will consider the costs of tuition, living expenses, and inflation to factor the costs of your goals. Another key to successful education funding is to start as early as possible. The more time on your side, the more you will benefit from compounded investment returns.
EXPLORE EDUCATION SAVINGS OPTIONS
There are several savings options available to you, each of which will have their own set of benefits.
- 529 Savings Plan: These tax-advantaged plans allow you to invest money for education expenses. All earnings in the plan grow tax-free when used for qualified education expenses. Income tax deductions, contribution limits, and eligibility for K-12 education expenses will vary by state.
- Coverdell Education Savings Account (ESA): These tax-advantaged accounts allow you to invest money for education expenses for qualified higher, elementary, and secondary education. All earnings in the account grow tax-free when used for qualified education expenses. Contributions to an ESA are not income tax deductible and subject to an annual limit of $2,000 per beneficiary. Eligibility to contribute is subject to modified adjusted gross income limits.
- Custodial Accounts (UTMA/UGMA): These accounts allow you to save for your child, but the funds become property of the beneficiary when they reach a certain age. Custodial accounts do not have the tax advantages seen with other education savings options. However, the funds can be used toward any expense for the benefit of the minor, which can provide flexibility for parents in the event a child does not follow the intended educational pathway.
- Prepaid Tuition Plans: These plans allow you to prepay tuition at today’s tuition rates for eligible public and private colleges, helping you manage future tuition costs. Prepaid tuition plans often do not cover any other expenses, such as room and board. However, most states guarantee that the funds invested into a prepaid plan will keep pace with tuition inflation. Income tax benefits, plan eligibility, and contribution limits will vary by state.
- Roth IRAs for Education: A Roth IRA is an investment vehicle often used for retirement purposes. However, it can also be used penalty-free toward qualified education expenses. The caveat is any earnings will be subject to income tax when used for educational purposes unless the account owner is age 59.5 or older. In most cases, your Roth IRA funds are best served for retirement given the benefits of the various options listed above.
INVESTMENT STRATEGY
Diversify your education savings portfolio by investing in a mix of assets. Many education savings options will have a suite of investment options to choose from to tailor to your specific goals and risk tolerance. As you get closer to enrollment, you have the option of diversifying into more conservative options to minimize volatility and protect your principal for education payments.
SAVINGS PLAN
Consider establishing a systematic plan to achieve your education savings goals. An annual education analysis will be your guide to determining your monthly, quarterly, or annual contributions to your education savings vehicle. Establishing an automatic savings plan can keep you on track and increase your probability of success in meeting your goals.
MAXIMIZE FINANCIAL AID
Research the various financial aid options available to you, including scholarships, grants, and loans.
Learn how to minimize your expected family contribution (EFC). The expected family contribution is used to determine federal student financial aid, which is calculated based on the information provided on the Free Application for Federal Student Aid (FAFSA). Minimizing the expected family contribution can provide additional financial aid resources.
Maximizing these options could help reduce the financial burden of education expenses.
TAX CONSIDERATIONS
There are many tax advantages to education savings. Consider exploring any eligible tax credits, such as the American Opportunity Credit or the Lifetime Learning Credit. Most states offer income tax benefits for contributions to eligible education savings plans – for high income earners, this is a valuable benefit to consider if planning to fund your children’s education. Education savings plans, such as a 529 plan, offer the benefit of tax-free growth and withdrawals toward qualified education expenses, allowing you to maximize your contribution and make your money go further.
Make use of the gift tax exclusion to contribute to your child’s education without incurring any gift tax – in 2024, the annual gift tax exclusion is $18,000 per person.
MONITORING AND ADJUSTING YOUR PLAN
Periodically reviewing your savings plan and investment portfolio is crucial to successfully fulfilling your education savings goals. As your goals and life circumstances change, your plan will need to be dynamic to accommodate and adjust appropriately.
Seeking professional advice from a qualified fiduciary can help you successfully meet your goals by creating a comprehensive plan tailored to your needs. This will include providing the annual education analysis, periodic review of savings and investments, accountability of meeting savings targets, and informing you on any tax law changes that will affect the plan.
CONCLUSION
Saving for your children’s education is a significant commitment. With proper planning and careful consideration of your options, you can ensure your educational goals are within reach. Following these essential steps can help provide better opportunities for your children and secure a bright future for your family.
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