Life Events

Few goals are as emotionally loaded as paying for a child's education. Whether you are thinking about private school, college or training after high school, the same principle applies: start with a realistic picture of the cost, then match the funding tools to your timeline and tax situation.

Start with the numbers

Estimate what you expect the education to cost, including tuition, housing, books and fees, and how many years away it is. Then decide what share you intend to cover. Many families fund part of the cost from savings, part from current income, and part from scholarships, grants, work and loans. There is no single right split, but you should balance this goal against your own retirement, because you can borrow for college and you cannot borrow for retirement.

Common ways to save

• 529 plans. State-sponsored accounts that grow tax-deferred, with tax-free withdrawals when used for qualified education expenses. Rules on what qualifies, and any state tax benefits, vary, so review the plan details.
• Education savings accounts. Accounts with annual contribution limits and income restrictions set by the IRS.
• Regular savings or brokerage accounts. More flexible, but without the special tax treatment. You keep control of how the money is used.
• Savings bonds. Interest may be excluded from tax in some cases when used for education, subject to eligibility rules.

Think about who owns the money

Assets owned by a parent and by a student are treated differently when schools calculate financial aid. Accounts in a child's name can reduce aid eligibility more than assets held by a parent. Gifting to a child's account can also have tax consequences. Consider these points before you move money around.

Use tax benefits where they apply

Federal education credits and deductions can reduce your tax bill in the years you pay tuition, but they have income limits and cannot always be combined with other benefits for the same expense. Coordinating withdrawals from savings accounts with credits takes some planning, which is where a CPA can help.

Borrow carefully

If loans are needed, favor federal student loans before private options because of their repayment protections, and keep total borrowing in line with the income the degree is likely to produce. Try not to take on more than you could reasonably repay.

Start early, stay flexible

Small, regular contributions over many years often accomplish more than large payments made late. Review the plan each year as costs, income and your child's plans change.

We would be glad to help you build a funding plan. Learn about our tax planning services or contact us to get started.