Solution Law Firm Blog

Saving for College: Where and How to Do It

by | Jan 11, 2021

No matter how young or old your children may be, if it is important to you that they attend college, the time to begin saving is right now. The big question is – where do you place your savings? 

You may be able to take a few risks if you start saving early in your child’s life. However, that risk may not be as acceptable the closer you get to actually needing the funds. A sudden downturn in the stock market at the time you need the money can mean potential disaster if your investments are market sensitive.

It is important to maintain a connection to your investments regardless of the savings instrument you utilize. Give your investments to a financial advisor with no attention of your own is not usually the best bet. If you need help with this, bring it up during a Planning Session so we can help you determine which route is the best for your plans.

There are two types of savings instruments you can consider – the “529 Plan” and the Wealth Creation Trust. 

The 529 Plan, named for the section number of the IRS Code providing for its use, is the most common way to save for college. Under this college savings plan, taxes are not paid on the earnings if used for college, including books, living expenses, and tuition. A 10% penalty if assessed on the earnings if the money in the plan is not utilized for college. However, the principal can still me withdrawn without a tax penalty. 

While a Wealth Creation Trust doesn’t offer tax savings, it does offer flexibility. With this type of savings plan, you are able to establish the trust for the benefit of your child at a young age and ask friends and family to contribute throughout his/her lifetime, for example as a birthday gift. The child can become a Trustee of the Trust in order to learn to manage his/her assets as he/she hits specific levels of maturity determined in advance by yourself.

The funds in a Wealth Creation Trust enable your child to tarvel the worl, start a business, or whatever other purpose you may decide. Many think that those experiences and investments can be even more important than college. 

Possible alternatives to these options are tapping into funds saved for other events – most commonly, retirement. If your child were to use these funds, however, it could impact eligibility for need-based tuition assistance programs. If your child were to use retirement funds to pay for college expenses it would have to be reported on the FAFSA as additional income. Potential financial assistance could be reduced when utilizing retirement funds because the “Expected Family Contribution” is then higher. 

There are two positives to consider when paying college expenses – the American Opportunity Tax Credit and the Lifetime Learning Credit. These tax credits allow a student and the parents of the student to reduce tax liability, dollar for dollar, based on his/her tuition payments. The American Opportunity Tax Credit gives a credit of 100% of the first $2,000 in tuition costs and 25% of the following $2,000. The Lifetime Learning Credit allows for a credit of 20% of the first $10,000 in tuition – regardless of the number of children that are incurring expenses. 

Both of these programs of course have income limits in order to qualify. For those who are married and filing joitn tax returns, the limits are $180,000 and $130,000 respectively. The limits are $90,000 and $65,000 for those who are single.  

This article is a service of The Solution Law Firm, P.A. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Planning Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Planning Session and mention this article to find out how to get this $750 session at no charge.

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