Your education--A smart investment
What are the financial benefits of a college education?
It’s a great investment! According to the US Census Bureau, the average
college graduate will earn about $350,000 more than a high school graduate over a 30-year
career. In addition to future income, there is also the fact that 70% of college
graduates rate their jobs as "highly satisfying" in comparison to only 25% of high school
graduates. For more information about the benefits of college, check out the
US Department of Education.
When should someone start to invest?
It is best to start planning for a child’s education at birth. Of course, not
everyone has the foresight to do this. The more years your family has to prepare
and save for school, the better. Many families will immediately open a savings
account when a child is born—often times, with separate accounts for each child.
Your tax advisor or accountant can help you consider the possible tax advantages of opening
accounts and investments in your children’s names. If your child is headed to college
in the next two years, check out our tips on last-minute
financing.
Long-term savings plans can also come with certain tax-deferred savings advantages as
well. Northwest Financial Resources
has professionals who can help you plan a course of action. Some investment plans you
may want to consider:
Custodial and trust accounts
These accounts can be set up so that a parent retains control of any funds saved for a
child’s education. Custodial and trust accounts usually require the parents to assume
responsibility for an taxes on income from the accounts’ earnings. If you are a
parent or a relative who wants to open a deposit account for a child’s education, any
Member Service Specialist at Northwest Community Credit Union can help you explore your
options. However, we suggest you talk to your accountant and/or one of our consultants
at Northwest Financial Resources if you
are interested in custodial accounts that may include the following features: estate
planning, tax-advantaged savings, or securities investments.
Education IRAs (Individual Retirement Accounts)
The Education IRA is a great tool for
people who want to save for their children’s future education needs. Contributions are
made with after-tax dollars, and all of the IRA’s earnings accumulate on a tax-deferred
basis. Funds may be withdrawn from the account for qualifying higher education
expenses—before the child turns 30—without taxes or penalties. To an extent, funds
may also be held in certain other IRAs, penalty-free, for qualified higher education
expenses. Keep in mind, income taxes will apply to funds that are withdrawn from
Traditional and Roth IRAs—even when used
for higher education. If funds are withdrawn from an Education IRA in excess of a
child’s qualified higher education expenses, the withdrawals may be subject to both income
taxes and a 10% IRS penalty. Although the parent retains control of the account’s
funds, the money in the account must be spent or paid to the beneficiary by his or her 30th
birthday. These accounts may be rolled over into new Education IRAs for family
members of the beneficiary.
Growth mutual funds
This type of investing is a fairly aggressive investment vehicle for parents with children
who are more than five years away from college. Such investing is not guaranteed,
but—with a greater amount of time to follow the stock market’s trends—mutual
funds generally increase in value. Because there is no maturity date or
specified beneficiary age for the child, parents may want to keep the funds in their own
name. You probably wouldn’t want to rely on mutual funds alone. If the child
enters college during a slump in the stock market, you could lose money by cashing out at
the wrong time. Although past performance is no guarantee of future results, growth
mutual funds have enjoyed high gains over the years (despite inevitable drops and declines).
Investments with steadier (but less aggressive) growth are better for parents of children
who will enter college in less than three years. We recommend that new parents talk
to a financial consultant as soon possible—this makes it easier to plan for your child's
education.
Minimal risk investments
If you are starting to save for an education with only three or four years to prepare, you
will want to minimize your risk. For short range investing with an impending
cash-out date, risk (or the stock market’s inevitable rises and drops) is far less
tolerable. The best approach might be a balanced mutual fund, with a mix of stocks
and bonds. This is a fairly conservative investment plan that minimizes risk.
Northwest Financial Resources has financial
consultants who will work with you to chart a course of action.
Unified Gifts to Minors account (UGM account)
UGM accounts (also known as the Uniform Transfer to Minors Act) allow parents to
invest in stocks and securities while keeping the taxable assets in a child’s name.
Children are not usually allowed to buy and sell assets directly, so a custodian conducts
business on the minor’s behalf. Such accounts may allow parents to decrease their
taxable income while saving money for a child’s education. The problem with such
accounts is that the child is entitled to all of the money when he or she reaches the age
of "majority." In other words, parents may set aside money for a child’s education,
but the child may use the money for any purpose as early as age 18. Also, if parents
divorce (in some states and under certain circumstances), they may lose certain tax
advantages on the account. Withdrawn funds may be subject to taxation if not used for
education or for the child’s support. We recommend that any family who considers such
an account should carefully discuss this option with an accountant and one of our financial
consultants at Northwest Financial Resources.
Oregon College Savings Plan
The state of Oregon offers an easy, efficient
way to save for your child's college education. With this plan, up to $2000 is tax
deductible each year. Click here for more information about
the Oregon College savings Plan.
Zero risk investments
For families with only a year or two to save, short-term treasuries are an extremely safe
investment. Zero coupon treasuries pay a set amount upon maturity. This type of
investment is available through Northwest Financial Resources. Our credit union
offers a wide range of additional deposit accounts which are federally guaranteed.
Money markets,
fixed IRAs,
certificates of deposit and certain
investor accounts all enjoy set earnings rates which enjoy a specified cash-out amount for
when your child enters college. The nice thing about these accounts is that there will
be absolutely no surprises if you know when you are going to withdraw funds for your child’s
education.
No one plan can be applied to all families. It’s important to talk to a consultant
at Northwest Financial Resources as soon
as possible. If you don’t start when your child is born, there are still many courses
for aggressive saving and investment up to five years before your child enters college.
If a family is financially stable—or willing to suffer drastic savings measures—"last-minute" savings plans are still possible.
Pre-paid tuition
We all know that colleges must raise the costs of tuition on an almost annual basis. This is one reason that sound financial planning must take future inflation and probable tuition expenses under consideration. Because of the continuing increase in costs, many states and colleges offer pre-paid programs. You will need to plan well in advance, but it can be advantageous to pay tomorrow’s tuition at today’s prices. There are also some possible disadvantages to this. Many plans return only the initial deposit—without earned interest—if the child is not admitted or refuses to attend. Similarly, pre-payment may limit a student’s ability to transfer to another school. Under certain circumstances, the child may have to pay taxes on gains made under such programs. Such plans usually rely on the creation of a trust for the child, and any gifts to the trust must be reported to the IRS. Talk to a financial consultant before you decide to sign up for a pre-paid tuition plan.
Tax Reform Act of 1986
After the Tax Reform Act of ’86, every child became limited to $1,200 in unearned income (indexed for inflation). This Act affects long-range planning for your child’s education. What this Act means is that all unearned income (dividends, interest, or capital gains) above $1,200 per year is taxed at the parents’ tax rate. Children above age 14 pay 100% on all of their taxable income, so it may be sensible to put enough assets under your child’s name to generate up to $1,200 per year. So, for example, a child below age 14 would have paid $60 in taxes on an interest income of $1,000 in 1993. If the parents kept that same amount under their name(s), they would have paid $310 in taxes if they fell in the 31% tax bracket. There are other rules and laws, like this, which the financial consultants at Northwest Financial Resources discuss during free financial seminars or in one-on-one appointments.