In the words of advisor Stephen Korving, the ideal college planning conversation sounds something like this:
“Congratulations on the birth of your child! This is very exciting… Do we want to talk about college planning?”
His attempt at comedy aside, it captures a foundational truth about saving for college: start early. Today, we’re exploring 3 of the most important considerations we discuss when addressing college funding.
1. The Early Bird Gets the Compounding Growth
Whether it’s retirement or college tuition, the best thing you can do is start early. Not only do you gain the incredible value of compounding growth, but you also gain the freedom to pace your savings realistically.
We’ve worked with clients who opened a 529 savings account when their children were born. We’ve also welcomed new clients just starting to plan for their 13-year-old. The latter can cause far more anxiety, even for a family with a higher income.
When you start early, you can contribute less and let your money work on your behalf. You put less in over a longer period of time. If time is on your side, start early.
If you’re just starting to plan for your 13-year-old, there are still things you can do. Don’t panic too much! That might just be a different article.
2. Grandparents Helping Kick-start Early Growth
For some families, grandparents may have the desire to help support college savings for their grandchildren. This can present enormous benefits for families.
For example, we frequently have grandparents who kick off the savings plan for their grandchildren with an investment of several thousand dollars. This has a few key benefits:
- Maximizes the compounding effect by getting a larger sum invested early
- Potentially reduces your tax liability
- Shows your support to your adult children and grandchildren in a critical financial area
If you are a grandparent considering ways to support your grandchildren, this is one of the best investments you can make.
3. Understanding College Alternatives
Some families are nervous about making purposeful investments in college planning. Understandably, with tuition costs rising, alternatives are growing, and trades still present rewarding careers.
Thankfully, 529s are a multi-faceted tool with more potential uses than many families realize. Here are three examples:
- Multi-generational Family Fund: Any unused funds can be redirected. The unused funds can be used by a sibling or become a head start for a future generation.
- Vocational Schools: Have a child or grandchild interested in the trades? Your 529 account can be used for vocational schools.
- 529 to Roth IRA: A recent rule change now allows you to transfer any unused funds to a Roth IRA without a tax penalty.
Simply put, a 529 is a valuable asset with multiple uses. However life plays out, it keeps its value.
Where Does Saving for College Fit Into Your Plan?
Whether it’s for your kids or grandkids, where does funding your college savings goals fit into your broader financial priorities? This question varies from family to family, but the core principles remain the same.
Do what you can to start early. Let compounding do its work.
Embrace multi-generational collaboration where welcomed.
And one final thought: communicate your plans with your kids. Saving for college represents an invaluable opportunity to highlight topics like the power of investing, realistic budgets, and ROI-minded decisions.