LEGO® Blocks, Elephants, and Four-Letter Words—
Who knew tucking your children in at night could become hazardous to your health? My children are at the age where messy, toy-strewn rooms are common. After tucking my daughter in and successfully avoiding the hazards of dolls and Barbie accessories, I was not so fortunate trying to navigate my son’s room. While he had heeded my parental warning to pick up his room prior to bedtime, there was one lonely LEGO® block left on the floor, and after shutting out the lights, I proceeded to step squarely on the sharp-edged building block.
While writhing in pain, and doing my best to not yell obscenities, I sat back in my recliner and thought about how to rectify this situation… We regularly donate gently-used toys to charity, or pass them on to other family and friends, but my children are blessed with a fantastic supporting cast of loving grandparents who undoubtedly spoil their grandchildren. Their head-over-heels in love grandparents are the key!
In my line of work with multi-generational families, I am often asked, “How do we save for our children’s college education?” With the cost of tuition increasing every year the sum of money for a four-year degree is very significant. Since I am in Kansas, let’s look at local universities. To attend KU, it may run around $20,536 per year, and to be a Wildcat at Kansas State it may be closer to $23,470 (Google average cost). You could choose to go to my alma mater and become a Gorilla at Pittsburg State for approximately $19,190. The point is, you are looking at $70,000 to $100,000 for a four-year degree with multiple factors that could drive the cost up or down. To fund an $80,000 college education, inflate that cost by 6% each year and you would need to save $521 per month from birth to fully fund that college expense by age 18!
Here in lies the Elephant in the room! How do you save $521 per month when you already have a million other obligations and priorities on your monthly budget? How do you eat an elephant? You must do it one bite at a time! And maybe, you invite some family to help.
Let’s break this funding college “elephant” down utilizing a 529 plan. A 529 plan is a state-sponsored account that allows your savings the potential to grow tax-deferred over time by investing in a wide range of investment options. The money in a 529 can be withdrawn tax-free provided the money is spent on qualified college expenses (room, board, tuition). Some states will give you tax deductions for making contributions to your child’s 529. Look through your income and expenses to see if you have the ability to reallocate a portion of your disposable income and set aside funds into a 529 college savings plan. Better yet, some employers may be able to set up direct deposit funds into a 529 so that you save automatically, or make monthly automated bank withdrawals from your checking account going to your 529 plan. Don’t miss this! The 529 is owned by the parents and not the child. The child is listed as the beneficiary. This becomes important when applying for Financial Aid.
Here is where the four-letter word comes in – the dreaded FAFSA form! Ok it’s five letters, but you may think a four-letter word when filling out the paperwork every year! The Free Application For Federal Student Aid is required paperwork for most college applicants. The FAFSA takes into consideration your family’s finances and comes up with a number called the Expected Family Contribution. This will then determine what level of assistance, loans, grants, and scholarships an institution may offer to help pay for college costs called a Financial Aid Package. Two things to keep in mind:
- Assets in the child’s name count for 20% of that calculation and parental assets count towards 5%. This is where a 529 is at an advantage to other college savings vehicles because they are PARENTAL assets vs the CHILD’S assets. UGMA, UTMA, a child’s named savings account and savings bonds belong to the child.
- Anyone can have a 529 plan. This Includes aunts, uncles, and yes, grandparents! Grandparents are not obligated to save for their grandchildren’s college education, but I have lots of clients that often want to help in any way possible.
AND… the FAFSA form doesn’t ask about those assets therefore, they are not included in the calculation at all! And to top it off, the grandparents or extended family will receive the tax deduction for contributions to their own 529 plan! BOOM! For the cost of a Lego® set, you can open a 529 plan and gift money into a college savings account making an investment in the child’s future.
by Derick Walters, CFP®
Prior to investing in a 529 Plan, you should consider whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in that state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings. Please consult with your tax advisor before investing. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.