By Mariette “Pete” Luchini, CPA, Wenatchee Certified Public Accountant
Whether your child is an infant or a senior in high school, the question of how to pay for college may have you perplexed. With good information, advice, and implementation, you may set your mind at ease. Consider these factors when planning: household budget restrictions versus needs, the current age of your child(ren), and the available options for saving. Your personal budget may limit you. Put simply, while you can borrow for college, you can’t borrow for retirement. Take advantage of any 401(k) match before you squirrel away money for the kids, no matter their ages.
If your budget allows for college savings, there are a number of methods available to set money aside for college: 529 plans, Coverdell Education Savings Accounts, UGMA/UTMA accounts, qualified U.S. savings bonds, and Roth IRAs.
Individual states sponsor “529 plans” as either savings plans or prepaid tuition plans. A savings plan is similar to a traditional investment account while a prepaid tuition plan has savers purchasing units at a set rate to be held toward future college expenses. The prepaid plans hedge against rising education costs and are most advantageous when buying units for younger children. Washington State’s 529 plan (www.get.wa.gov/) is a prepaid tuition plan called GET (Guaranteed Education Tuition). Both types of plans allow the money/units to generally be spent at schools in any state, to include most private universities, state schools, community colleges, and vocational schools. With these plans, the tax benefit is tax-free growth on earnings and appreciation. The result is no taxes are paid when the monies/units are withdrawn to pay tuition.
A Coverdell Education Savings Account has a $2,000 per beneficiary, per year contribution limit. The contributions must be made prior to the beneficiary turning 18. While the account balance must be used by age 30 and high-income restrictions may limit its use, there is some flexibility as some categories of K-12 expenses qualify.
UGMA/UTMA accounts are a way to “gift” assets to children. Up to $1,000 in earnings and gains is tax exempt to the minor. These accounts often take advantage of the annual gift tax exemption of $14,000 per donor, per donee. An example: Grandma and Grandpa individually gift $14,000 ($28,000 total) yearly into one of these accounts. However, in Washington, when the beneficiary turns 21 they become the owner of the account and may use the cash however they choose. Ultimately, whomever owns the account should consider the affect that may have on qualifying for financial aid.
Up to $10,000 in qualifying U.S. savings bonds have tax free earnings when used for qualified education expenses. In today’s interest rate environment, these may not compete with the cost of inflation, resulting in a very conservative method of savings. Also, bond purchasing is restricted to those age 24 and older.
A Roth IRA retirement account used properly can be a viable college savings option. The maximum annual contribution is $5,500, and the account owner must have taxable income in order to contribute.
An option available to some high school students is Wenatchee Valley College’s Running Start program. Eligible students may attend during their junior and senior years of high school, at little cost, resulting in graduating high school with a general two-year college degree.
Successfully navigating the complexities of these options is best done with the guidance of a trusted advisor and/or tax professional. As education costs continue to rise, committing to a savings plan will result in freedom of choice when it comes to college decisions. One final rule of thumb – determine the college budget first and then choose the college, not the reverse.
Pete Luchini is a Certified Public Accountant with Cordell, Neher & Company, PLLC, a Wenatchee public accounting firm.