Saving for college: Is it ever too early, or too late?
julie thomas sward, partner, moneta group
It’s never too early, or late, to start funding your child’s education. The earlier you start, the more time you have to save and to allow the funds to grow. You can open a 529 College Savings Plan as soon as you get your baby’s Social Security number and add as little as $25 per month (although you should increase your contributions as you can afford it). This is especially important because a student entering college now pays between $15,000 and $55,000 per year for a four-year degree in Missouri. That means you have approximately 18 years to acquire between $60,000 and $220,000.
With a 529 Plan, your investments are tax-deferred and come out tax-free as long as they are used for qualified higher education expenses at any eligible education institution. Plus, with a Missouri MOST 529 plan, you have access to Vanguard and DFA funds and can even choose an age-based investment. Ultimately, even if your child is just a few years away from college, you should start saving. If you are concerned about market volatility, choose a 529 plan with a fixed or guaranteed rate of interest, such as the Colorado Stable Value Plus Plan. As a Missouri resident, you get a tax deduction for annual contributions to any state 529 plan.
It is also important to have a frank conversation with your child about the cost of higher education. He or she should be part of the solution to funding their education, which makes it important that they understand the true cost and value of getting their degree.
david ott, partner, acropolis investment management
Planning for college is more difficult than most people realize because the range of potential costs is extremely broad and you don’t know what they will be until the very last minute. For example, I have a 13-year-old daughter and while I hope she goes to Harvard, she may go to Mizzou—my mother’s alma mater. I’ll be proud either way, but I won’t know for another five years whether college will cost $15,000 a year, or $60,000. Let’s imagine, however, that I had diligently saved $8,000 per year in a 529 and put the money in an S&P 500 (assuming no costs or other frictions). Then, I’d have approximately $210,000 saved up, which is great news if she gets into Harvard, but a vast overfunding if she goes to Mizzou. Of course, I could use the excess savings to pay for another child, but it’s likely I would have been saving for them as well, in case they both end up at Harvard (a father can dream).
In this hypothetical scenario, the tax consequence and penalty of overfunding would be around $30,000 (assuming a 28 percent federal tax bracket), which is no small matter. It’s rare to see such a penalty for saving too much! I’m a huge fan of 529 plans and have recommended them to clients, friends and family, but like all good things, there are risks and unintended outcomes that have to be considered along the way, combined with all the uncertainty of where your kids actually will end up.
