Saving for children's college - USA and Canada

 

Saving for college - Bright Horizons / College Coach

What savings plan

Where should I house money

What investments

How much

Savings plan - things to consider

• Tax breaks (What if I did not use the it for education
• Financial aid impact (Saving for college works against fin-aid? Yes, but not much. Depends on income. Not dependent on assets - house, retirement accounts, vacation homes, savings not much impact as compared to income. Students income not impacting aid unto 6K but impact higher than parent’s account on fin aid after 6k. Don’t save for college in your child’s name. If you do, spend that first)
• Control Issues
• Non-use penalties

Types of saving plans

   - college specific plan - for people that know for sure kid will use it - 529/prepaid/coverdell - after tax money goes in, but growth is tax free for education. - can be transferred within the family.

• 529 - similar to 401k - mutual, stock, bonds - only one beneficiary per account - you can transfer, state plan can be used across other states. Tax reform bill - K-12 . start with your home state - because you get resident incentives
• 529s with rewards programs by attaching credit card
• Ranking systems - be wise about what ranking system is based on. Don’t take at face value. 

• Prepaid plans - tied to state’s public colleges, buy blocks of tuition in the future at today’s rate - 10K today’s fees - can use after many years in public school - even though fees is much higher after 10k. Non participating school risk. Also out of school risk. Some states don’t have a prepaid plan.

• Coverdell accounts - people now use 529more than cover dell. More investment options. Savvy investors like this. Married - less than 200K salary. Only 2K a year. 529 has unlimited saving.

• General Savings Plan (not college specific account - any purpose, no penalties, no tax benefits, child accounts - taxable on the child on child-tax rate , less tax on you , used for child only, 18 - child controls account, fin aid )

• Dual Purpose Plans - retirement - Roth IRAs, traditional IRAs, home equity

Roth IRA - tax free just like 529 , flexible to use both for college and other - good for older parents. 10% penalty is waived if used for college - but tax before 60. Contributions first, earnings next. Earnings - taxed. With 529 - earnings also tax free. Only 6k per year. Married - 200K. Can be possible for higher than 200k but needs discussion

Traditional IRA - early withdrawal where penalty waived for college

Home equity - wise if mortgage is already paid

Plan administrator - which state or which company managing the money

• All in one place - where other money already is, - someone who explains, trusted
• Fees - expense ratios, account , sales, commissions, management and admin fees

Investment plan

• Diversification - mutual funds
• Little in prepaid, little in 529, little in some else
• Liquidity
• Property is less liquid
• Active - fund manager - high fees - tries to outperform
• Passive - index funds - mirrors market

Risk Vs Return 

Timeline - based on target date

How much?

Half a million in 18 years for expensive colleges

Scholarship/ grant

Public college - 83%

Private college - 87%

Daycare - takes 12k a year may not give you any money to save

Once out of daycare - you make more for savings

High school - higher savings

College - pay towards tuition

Also paycheck

Use cashflow calculator

Extra cash

• Ending expenses
• Raises
• Bonuses
• Tax refunds
• Extra paychecks

Free money

• Investment growth
• Federal tax savings
• State incentives
• Rewards programs
• Family gifts - ask for contribution to that fund for parties

• 50 a month - 20K in 18 years n- 3% inflation 

• Counseling scheduled with bright horizons / facebook / Pinterest / podcast

• Review periodically

• Action plan

Q

529 - leave it there if child does not go to college , to wait and see. Transfer. Parents/ nieces, nephews, cousins, grandchildren can use this. Or get money out - unqualified withdrawal - taxed

Trade school is college? Broadly defined - community, grad school, federal aid eligible school - fafsa.

exception - trade school

529 Some universities outside of US - 500 overseas colleges - London school of economics.

Transfer from one 529 account to another - rollover

Another state - tax implications if you took state tax break

From 529 to another savings like ira - not possible

Child with disability - diff account

custodial account(FBO) - Child owning an account - has harsher treatment in fin aid formula, also child legally owns account

Diff if child is beneficiary rather than owner

Federal EFC formula - looks at most assets - except retirement / home equity

Some colleges ask for css profile

 College estimate included room and board

Canada - Saving for children 

Resp Canada similar to 529 for children educations savings. 

Max contribution - 50000

Gov gives us 500 in first year

And possibly 100 every year for Salary range if less than 97 

What if salary is over 97k

Tax free earnings 

And when used on student will be taxed on student’s income instead of your income. 

Should be used within 36 years of account opening. 

If not used contributions are returned along with grants from Government. 

If used on things outside education , tax will be levied along with 20% penalty. 

Anyone , even a friend can contribute to your child’s resp. 

There will be fees attached to maintain the account so do research and go to good bank. 

A subscriber can add many beneficiaries at any point and after death can assign another subscriber who can also add new beneficiaries. 

You can transfer between two separate resp accounts if there are common beneficiaries or siblings between the two accounts. 

So finally you get 50000 + earnings + 4K 

Earning itself can get you to 120k after 18 years if you forgo the 4K from the yearly gov grants on your 500 yearly contribution if you put in all of the 50k in the first year. 

You can also put in 30k in the first year and get lesser earnings and get the 100 per month by putting in 500 every month