The College Prepaid Dilemma

000801_0311_0006_tsmsYou have just brought your little bundle of joy into the world and already you are thinking about college for your baby, especially if you live in a state that has a College Prepaid Savings program such as Florida.   Parents typically will call Florida Prepaid to get a jump on locking-in the college tuition rate  for their child and are soon subjected to sticker shock.  They hadn’t realized how much the cost had increased and quickly become discouraged at the thought of adding such a large expense to their monthly budget.   This is typically when new parents will reach out to a financial advisor to request guidance regarding their college savings dilemma.

Gone are the day’s of the $10,000 prepaid college tuition plans that your parent’s locked-in for you and/or your siblings.  Today, most parents are looking at a cost of 5 times that rate.  But don’t panic.  The good news is that you have other savings options to consider and your child is fortunate to have you as a parent already planning for their future.

In a nutshell, there are basically 3 options to consider when saving for your child’s college education: Prepaid 529 plans (available in only select states), traditional 529 plans and custodial accounts.  Let’s review the pros and cons of each option for your consideration.

The pro of the Prepaid 529 plan is that you assume no stock market risk since it is underwritten by your state.   The con is the high upfront cost or monthly cost which can be a large expense that many families with single or multiple children cannot always afford.  This is often the case right after birth when there are a number of new expenses facing your family.

The pros of traditional 529 plans include the ability to create a well-diversified portfolio of mutual funds or exchange traded funds (ETF’s) that offer tax free growth.  Before selecting this option, you should investigate whether or not your home state offers a tax credit for opening a 529 account.  Traditional 529 plans can subject you to stock market risk (downside) but also with the potential for better returns (upside) than a Prepaid Plan.   This might be the best option for parents who do not live in a state that provides a Prepaid program or for parents who cannot afford the high upfront cost or required monthly payments associated with a Prepaid program.

A custodial account is another option that allows parents the flexibility to invest in virtually any investment you would like and the money can be used as you see fit as long as it is for the benefit of your child.   Each parent can contribute up to $14,000 per year ($28,000 total) to a custodial account without having to worry about gift tax ramifications.  A custodial account can easily be opened at a number of financial institutions such as Charles Schwab or TD Ameritrade.  The cons associated with a custodial account is that it does not provide tax-free growth like a traditional 529 plan and must be “turned over” to the child once they reach the age of majority (18 or 21 years of age depending on your state of residence).

Remember, your decision on which education savings vehicle to choose should be based upon your current and anticipated future financial situation.  The traditional 529 plan offers the most flexibility if cash flow is a concern and the cost of a Prepaid plan is too high for your current budget.   Whichever option you choose, you should remain committed to begin saving for your child/children as soon as possible, due to the power of compounding interest.  Also, consider requesting college savings gifts from family members for birthday’s and holiday’s, versus the typical gifts of toys or clothing.  A little can add up fast.

If you would like greater detail on each of the college savings options I mentioned above or have another financial question, I would be happy to assist you.  You can reach me at 1-800-658-9560 or tombalcom@1650wealth.com.

1650 Wealth Management is a Fee-only, Independent, Registered Investment Advisor (RIA) firm located in South Florida with office locations in both Fort Lauderdale and Miami.  The Certified Financial Planners (CFP®) at 1650 Wealth Management possess over 40 combined years of investment experience, specializing in working with business owners, entrepreneurs and working professionals.

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