How to Save for College at Every Age for Education
07/29/2015 12:04PM ● Published by Kristen Castillo
The cost of going to college continues to grow. According to the College Board, attending an in-state public college costs $23,410 while a private college is $46,272. Saving money now is essential, says CPA Paul Lee with PSG Certified Public Accountants in Roseville. “Depending on career/college choices, the expenses usually exceed a family’s budget, so save early to ensure you help your children jump-start their road to success,” Lee says.
Even if you didn’t start saving years ago, you still have time. “It’s never too late to start,” says Allen C. Archuleta, Jr., co-founder and CEO of Iron Peak Advisors in Roseville, who explains that while long-term investment is ideal, “with having to pay for books, tuition, housing, supplies, etc., a student can benefit from fiscal support at any level during their collegiate career.”
The most popular way to save for college is to invest in a 529 college savings plan, which is tax-advantaged and sponsored by states, state agencies and some private colleges and universities. “Your best option is to use the age-based college savings funds,” says Archuleta, Jr., noting that the plans adjust the risk so it’s more aggressive for younger students and more conservative the closer the student is to starting college.
“All plans offer the same tax advantages as the next, which is tax-free earnings used for qualified education expenses,” says Lee, who recommends investing five percent of your gross income each year to a 529 plan.
Archuleta, Jr. tells his clients to pick a state college, an out-of-state college and a private college they’d like their child to attend. “Pull the current tuition rates for all three schools and calculate an average tuition rate for all; then, take this number and multiply it by the number of years your child is anticipated to be in college, usually four,” he says. Next, use an inflation calculator to estimate the adjusted total amount you’ll need to pay for the child’s education, and then plan your savings installments. Just remember added expenses, like books and room and board.
Investment Time Frames
STARING IN KINDERGARTHEN
open a 529. “A little savings early [on] will instill good annual habits and go a long way,” Lee says.
STARTING IN FIFTH GRADE
and you haven’t opened a 529 account, now is the time. Make contributions regularly. “Check-in with your financial advisor to analyze savings to date and formulate a good savings strategy to maximize savings for college,” Lee advises.
STARTING IN NINTH GRADE
“it’s crunch time,” says Archuleta, Jr., who recommends making “consistent contributions to the plan” and encouraging friends and family to contribute in lieu of gifts. This is also the time to start researching scholarship and grant opportunities, which can offset college expenses.
Students who are working can contribute up to the amount of earned income or a maximum of $5,500 into a Roth IRA, which Lee advises doing since it “will create another investment vehicle for savings that can be withdrawn penalty free if used for higher education.”