Saving for College
Having children changes everything.
Suddenly you’re focused on their
future as well as yours. Most families
want to do everything to help their
children succeed, and one way is to
pay for some or all of college. Let’s
explore one way to save for college:
Prerequisite:
Like taking a 100 level course before
the 300 level course, there is a
prerequisite to hit before saving for
college. First, take care of yourself -
get comfortable with your emergency
and retirement savings. After all, your
child can take loans for college, you
can’t take a loan for retirement. Also,
most would rather pay off student
loans than pay for you in your old age
(trust us, we see both circumstances).
If you aren’t comfortable with your
retirement savings yet, review our
previous article for Evanston Woman.
529 Plans College Savings Plans:
If you believe you are ready to save
for college, the best option is a 529
college savings plan. Why? Because
any yearly investment growth is
not taxed; additionally, the growth
isn’t taxed if you withdraw it to
use for education. That’s right, you
never pay taxes on the investment
growth if used for education.
Another advantage of 529 College
Savings Plans: if you live in Illinois,
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you can get an Illinois income tax
deduction for contributions of up to
$10,000 per year ($20,000 per couple)
to one of the Illinois sponsored plans.
The Illinois Bright Start plan has solid
investments and low costs. It is a good
option for most people in Illinois.
That said, each state has a 529 plan,
and they don’t limit your student’s
college choices. So you could, for
example, live in Illinois contribute
to a plan in Nevada (you would
not get an Illinois tax deduction)
and pay for college in Delaware.
With these plans, you open an account
as the owner and contribute money
for a beneficiary (your child). You
then invest your contributions from
several choices offered within the plan.
One way to approach this decision
is using the age-based mutual funds
offered in all plans. They have funds
for children of various ages (e.g. funds
for children aged 0-2 or 3-5), which
are great, simple options if you don’t
feel comfortable making complex
investment decisions.
529 FAQs:
Extra money – If you have extra
money in a 529 (a good problem), you
have options:
You can change the beneficiary of
the account to a relative (normally
from one child to another).
You can save it for a child’s graduate school.
You can withdraw the money, but
you will pay taxes on investment
growth AND a 10% penalty.
Scholarships – You can withdraw the
amount of a scholarship without penalty
(you still pay taxes on the investment
growth). Or you can use the money for room
and board and other qualified expenses.
Financial Aid – Yes, a 529 plan reduces
your child’s aid eligibility. However, when
the assets are in your name, it reduces
aid only by a maximum of 5.64% of the
account value.
What else should I know?
There are two types of 529 plans: prepaid
tuition plans and college savings plans.
We find prepaid tuition plans restrictive
and normally recommend savings
plans (which we described earlier).
If you have questions, feel free to contact
us through our website. Otherwise, we’ll
talk to you again soon with an upcoming
article about teaching your children
how to manage money responsibly.
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