Walker encourages finding a CPA well versed in college planning who can create a blueprint that clients can take to their local CPA to execute. She describes the specialist as the architect of the tax plan and the local CPA as the general contractor.
Focusing on 529s
Walker would like to see more employers offer 529 college savings plans as an incentive to get employees to save for college. “I think they’re one of the most underutilized employee benefits plans on the planet,” she says. If it’s passed, the Boost Saving For College Act, a bill introduced earlier this year that provides for an employer match, “can be a game-changer in the 529 space,” she says.
The legislation, as written, would also allow excess funds to be rolled over into a Roth IRA, enable families with a disabled child to roll a 529 plan into an ABLE account, and provide a nonrefundable tax credit that acts as a savings match for low- and moderate-income families.
Suzanne Shier, director of wealth planning and tax strategy for wealth management at Northern Trust in Chicago, also speaks to many clients about 529 plans, and she views them as a good multi-generational tool. She likes their tax advantages, flexibility and gifting provisions.
Married couples that take advantage of the accelerating five years of annual gift tax exclusions on the front end can gift up to $140,000 all at once to a 529 plan. Based on her calculations, $140,000 gifted to a 529 plan when a child is born can balloon to $473,191 by the time the child is 18. This assumes the portfolio grows at 7% per year and it’s a reminder, she says, to be aware of not overfunding a 529 plan.
A nice perk of grandparent-owned 529 accounts, says Shier, is that the grandchildren can see what their grandparents have done for them. “There is a degree of appreciation, gratitude and relationship-building that can happen, particularly between a grandparent and grandchild,” she says.
Grandparents can also set aside trust funds to pay for college and graduate school expenses, says Shier. Although the trusts won’t necessarily have the same income-tax attributes as 529 accounts, the assets in the trusts can be invested to manage income taxes, she says.
Shier says growing college savings tax-free has become more significant as tax rates have climbed. When weighing tax-free and taxable accounts, she says families should consider their federal income tax rate, state income tax and the 3.8% net investment income tax if their modified adjusted gross income exceeds the applicable threshold ($250,000 for married couples filing jointly). All told, these taxes can add up to close to 50%, she notes.
Training Ground
In addition to crunching the numbers this fall, parents should be having conversations with their college-bound kids. “Use planning for college as an opportunity to introduce children to the concept of their personal financial management in a context that’s relevant to them,” says Shier.
She strongly suggests helping kids understand the costs of college. It’s also important to discuss whether the parent, student or both will be responsible for different categories of expenses such as tuition, room and board, health insurance, personal expenses, entertainment and clothing, she says.
When her two daughters were still in high school, Shier taught them to start budgeting their money quarterly. “I wouldn’t say that either of my daughters were clotheshorses, but they found the sales rack at the department store pretty darn fast after the budgets started,” she says. One daughter ran out of money in high school a couple of times before the end of the quarter. Budgeting “was a very constructive experience in terms of them getting to college and not being overwhelmed or frivolous,” says Shier.
The conversations shouldn’t stop once kids arrive on campus. A father she met at a recent work function sends his children, who are in college, emails every Monday morning that say, “Have a great week; let me know if you need anything; and school this week, by the way, will cost X dollars,” says Shier. “Kind of a reminder that we’re here for you and we want you to do what you need to be doing while you’re in school.”
By the way, says Shier, a $60,000-a-year college costs about $400 dollars a day.