There’s one golden rule that seems to come up in talks of saving money: It’s never too early. That goes for everything from retirement to saving for education expenses for a child or grandchild. But it’s important to have a strategy for different investments.
“It’s common for people to zero in on one goal like retirement savings or paying off debt,” says Ryan Bibler, managing director of investments for Bibler Finney Panfil Private Wealth Management Group of Wells Fargo Advisors. “We recommend trying to strike a balance between building an emergency savings, saving for short- and intermediate-term goals, saving for college expenses, saving for retirement and paying down debt.”
The Bibler Finnery Panfil team recommends keeping savings for education separate from other investments. That can help encourage building savings for that specific goal and avoid dipping into retirement funds or other savings. It also allows for independent investment strategies.
“When you save for college separately, you can invest earmarked funds more aggressively when your child is young but make the portfolio more conservative as college approaches,” says Vincent Finney, managing director of investments for Bibler Finney Panfil Private Wealth Management Group.
The most common vehicle for education savings is a 529 plan. Those allow the owner, typically a parent or guardian, to retain control of the assets while others – such as relatives or friends – are able to contribute as well. Earnings from a 529 aren’t taxed for qualified withdrawals, including expenses such as college tuition, room and board, and even laptops.
For Ohio residents, 529 plan contributions up to $4,000 annually can be deducted from state income taxes. Contributions carry over from year to year, so long as Ohio residency is maintained, meaning that an initial contribution of $20,000 could be used to deduct $4,000 from state taxes for five years.
There are other savings routes that can help with future education costs. Custodial accounts, such as Uniform Gifts to Minors (UGMA) and Uniform Transfers to Minors (UTMA) accounts, don’t need to be spent on education expenses and go through a financial institution rather than a third-party investment company. Once the beneficiary reaches age of majority, they take control of the
assets.
The Bibler Finney Panfil team says that these increase investment options as they can be put into individual stocks, bonds, CDs and more. The downside of a custodial account, however, is a lack of tax benefits.
“If they’re worried about overfunding 529 plans,” says Joseph Panfil, managing director of investments for Bibler Finney Panfil Private Wealth Management Group, “building up a balance in a UTMA account would provide a safety net if additional college expenses are needed and would also make money available for additional expenses that often occur after college like cars, weddings and even down payments on their adult child’s first home.”
Even if a child ultimately faces lower-than-expected education costs, money saved with a 529 plan can be redirected to another immediate family member while still maintaining the tax benefits. So, if one child receives a substantial scholarship, a younger child could still receive the savings. The money could also be put toward a child of the beneficiary.
To determine the best savings strategy, it’s wise to speak with a financial advisor who can explain intricacies of different options and give advice based on individual circumstances.
Still, the general wisdom prevails: It’s never too early to start saving.
“Parents can take control of the situation by saving,” Bibler says. “If college becomes more affordable or free somehow, they’ll be glad their savings can now be used towards other goals. If they hope for free college and instead it becomes even more expensive, they’ll be in a much more difficult situation.”
Cameron Carr is an editor at CityScene Media Group. Feedback welcome at ccarr@cityscenemediagroup.com.
