As a parent, you want the best for your child, and providing a quality education is one of the best gifts you can give them. However, the cost of higher education continues to rise, making it crucial to start planning and saving as early as possible. The college savings specialists at Boelman Shaw Tax & Financial Planning in Des Moines can help you navigate the complex world of education planning and find the best strategies to fit your family's needs.
The Rising Cost of College
The cost of a college education continues to rise at a staggering rate. According to the College Board's most recent data, the average annual cost of tuition and fees at a four-year public college in the United States for the 2021-2022 academic year is $10,560 for in-state students and $27,020 for out-of-state students. Private colleges, on average, charge $38,330 per year. The cost of attending college has increased by approximately 2-3% per year in recent years, which is lower than the 6.5% increase reported by the Department of Education a decade ago. However, this rate is still and has made saving for college a top priority for many Iowa families.
Starting Early is Key
The key to successfully saving for college is to start early. Even small contributions can add up over time, and the chart below illustrates the potential amounts you could have saved by the time your child turns 18, given various monthly investments.
|Child's Age Now||$100/month||$200/month||$300/month||$400/month|
*Amounts assume a 6% rate of return compounded annually. Consult a professional to determine the best investment options for you and to discuss potential return rates.
Saving 50% of the total cost of college is a good general rule, but even if you can't save that much, any amount helps. It's important to consult with a professional to determine the best investment options for you and to discuss potential return rates.
Tax-Advantaged College Savings Strategies
Choosing tax-advantaged college savings strategies can help you make the most of your savings. Here is a summary of some popular options to help you decide which is right for your family.
529 plans are among the most popular tax-advantaged college savings plans available. Contributions are tax-deferred, and earnings are federal tax-free if used for qualified educational expenses. Earnings are often exempt from state tax, particularly if the plan is sponsored by your state of residence. Beware of fees, which can significantly affect your overall return but often can be mitigated by choosing a plan sponsored by your state, maintaining a large balance, or making automatic monthly contributions. Limited investment options are available, and you cannot switch among options more than once per year. For more information go to College Savings Iowa.
Coverdell Educational Savings Accounts:
The Coverdell ESA, formerly known as an Education IRA, is an attractive option for some Iowa families. You can contribute up to $2000 annually, and contributions grow tax-deferred. Earnings are tax-free at the federal level and in most states if used for qualified educational expenses. Funds can be used for elementary, secondary, or college expenses. Income restrictions apply, and you have complete control over the investments. The beneficiary must be under 18 or have special needs. If there is a balance when the beneficiary reaches age 30, it generally must be distributed within 30 days. If the funds are not used for qualified educational expenses within this time, earnings are subject to tax and a 10% penalty. Contributions go into an account that will ultimately be distributed to the child if not used for educational purposes, giving the parent less control than a 529 plan offers. Taxes and penalties can be avoided by rolling the balance into another Coverdell ESA for a family member before reaching the age limit.
In addition to saving for college, it is also vital to protect against loss of income to ensure your child will have the funds necessary for a quality education. Consult with our Des Moines professionals to determine whether your life insurance and disability insurance are sufficient to cover costs in the event of family earnings loss.
Planning for your child's education can be overwhelming, but the professionals at Boelman Shaw Tax and Financial Planning in Des Moines can help. Our team of professionals can work with you to develop a personalized college savings plan that fits your family's unique financial situation and goals. We can help you explore all of your options, including tax-advantaged college savings plans, and make informed investment decisions. With our guidance, you can feel confident that you are taking the necessary steps to prepare for your child's future education. Contact us today to learn more about our education planning services.
Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.