Earlier this year, in March 2019, we saw stories of scandals in which celebrity parents were breaking rules to get their children into certain schools. We all want to ensure our children have the very best opportunities in life, but there are certainly better ways of accomplishing this! Today we are going to learn about a few ways that we can be a “bridge” for our kids. We can help them to be set up for success when they are ready to follow their educational paths.
Read on to test your knowledge with the following true or false statements and increase your understanding of some different savings options available for you!
- Every State has 529 accounts.
True. Every state has options available. Some have slightly different benefits - such as options for paying for instate tuition – but you can open an account in any state!
- Only parents can invest in a 529.
False. One of the great things about this type of an account is that friends or family can open a 529 for a special person and give it as a gift!
- You need to make less than $250k.
False. Unlike some other savings vehicles, there is actually no income limitation on a 529 account.
- Anyone can open a 529.
True! You do not need to meet any special requirements to open this account.
- Withdrawals can be used to pay for any US higher education expense.
True. Cash can be taken tax-free to pay for tuition at any US school.
- 529 funds can be used for K-12 expenses.
True. Not only can 529s be used for higher ed, but they can also be leveraged to pay for such things as private high school. They are a very versatile account!
- Lifetime contributions cannot exceed $300k.
True. However, this limit is only on the contributions, not the growth. An individual can contribute $300k, but if they start funding the account early, then compounding interest and returns could result in a much larger account after several years! For individuals with the ability to make high initial contributions, a savvy option can be to front-load the account with the yearly max limit of $75k (or $150k for a married couple). There is no gift tax on this money, and it can be done on a per-child basis. For those with the ability to do so then, it is a great way to save for a special child and will allow for large growth opportunity on the fund over the years until the child needs it for education!
ESA (Educational Savings Account) or Coverdell:
- Only couples with an income of $220k or less can open an ESA.
True. There is an income limit on opening this type of account. However, for those who do qualify, it is a great option to pay for K-12 expenses.
- There is a max contribution limit of $1k per year.
False. The max contribution limit on an ESA or Coverdell is actually $2k each year. Contributions can also only be made until the child’s 18th birthday.
- The ESA or Coverdell must be liquidated at age 30.
(Mostly) True. The account must be liquidated when the child turns 30, but this doesn’t mean the money has to be taken. ESA’s and Coverdells also allow the option to roll over to a new account such as for another child or family member.
Whole & Permanent Life Insurance
- Accumulations can be withdrawn tax-free.
True. Cash value can be taken to pay for anything such as a car or education.
- All withdrawals are free forever.
False. Too good to be true! The cash you pay into the insurance policy can be withdrawn tax free, but anything beyond this is either a loan that must be repaid or a distribution that is taxed.
- Insurance has better returns than a 529.
False. Again, wishful thinking J Insurance value will usually grow over time, but the returns are typically very modest. Individuals who buy a policy for their very young child might be able to leverage the value by the time college rolls around. But a family with a 17-year-old should not hope to purchase a policy tomorrow to fund a school next year!
- Income from property ownership can be used to pay for education.
True. This income is still taxable, so it is not magic, but income from rental properties or AirBnb’s can certainly be used to help fund school costs.
- Funds from owning an on-campus rental property can be used to fund education.
Also true. This is similar to owning a business and the funds can definitely be used for education expenses. For example, parents might purchase an investment property near the school where their child is going to college. The child can then live in the home and other students can pay rent. Win-win! We’ve blogged about this scenario in even greater detail, so check this out or talk to your financial adviser if you think it sounds like something you might want to pursue.
There are many different savings tools that parents can leverage to save for their child’s education expenses. Starting early and saving what you can, no matter how little, will help set your child up for success when they are ready to take their next steps into higher education. Help them bridge the gap and support them along the way. You can do this! Help the special child(ren) in your life to succeed!