It’s back to school time! School supplies, meet the teacher, curriculum night, school dismissal, PTO,… Every year we work so hard to make sure our kids have an excellent return-to-school experience. So, let’s use some of that momentum towards our long term goals. Don’t sweat. Just two things.
One
Back to school is a great time to evaluate your children or grandchildren’s education plan. For most people, the most effective way to save for higher education is a 529 plan, even if you live in a state with no income taxes, like Texas. Many states have income tax deductions for contributions, making the in-state plan relatively more attractive, but don’t stop there if your state has high fees and poor investment options. See the Morningstar Morningstar 529 Landscape report for a review of different plans, or ask your advisor for help in selecting one that works for you. Total costs, the availability of low cost mutual funds, and investment options that automatically lower the risk exposure over time are common elements of good 529 plans, according to the Morningstar report.
For gift tax purposes, you can contribute today as if your contribution was made ratably over five years, allowing you to use five years’ worth of annual exclusions at once. Withdrawals are tax free for qualified expenses, which include tuition, fees, books, supplies, and certain room and board expenses at post secondary educational institutions. Since 2018, qualified expenses also include tuition at an elementary or secondary public, private, or religious school, up to $10,000 per tax year, making 529 plans even more desirable.
Start with Goals
Next, review your goals. What range of schools and costs are you looking at? How much should you or can you save towards it? Use a calculator (like this one) to evaluate potential tradeoffs and get ballpark estimates of what you may need to save. The calculator can tell you how much you expect to accumulate by the time you child starts college under a number of scenarios that you can modify. There is a lot of discussion about the increasing cost of college. Unfortunately, no one knows what the future cost will be, although you can expect it to go up. The greater the cost, the more you will need to save. Set a goal that you think is reasonable, and review it every year as actual costs are published (see here for help). If you are not sure, save as much as you reasonably can. The uncertainty of college costs will gradually resolve over time.
Finally, think about asset allocation. Many plans offer “glidepath” allocations. In a glidepath, more risk is taken early on, when you have more time to adjust your savings and goals in case returns aren’t as expected. The allocation then gradually shifts to more conservative investments as you get closer to needing the funds. You can typically choose between more or less aggressive glide paths.
If college planning is important to you, let’s talk, or consult a CFP® professional.
Two
The other thing I recommend you do right now is to check the tax withholding from your paycheck. What? You always wondered how that’s calculated? Glad you asked. Withholdings are calculated by the IRS considering the amount you earn and the info in your W4 form (married or single, dependents, etc. You file this through your employer). The goal is to make you pay, at regular intervals, an annual amount that is a close estimate of what you will owe for the year. Following the changes to the tax law for 2018 and beyond, the IRS recommends you do a quick paycheck check-up. You may have read that for 2018 some people, including people who actually got a lower tax bill than in 2017, owed money to the IRS because too little was withdrawn during 2018. It stings when that happens, believe me.
There is still time to avoid big surprises. The IRS hosts a withholding estimator here. Use the YTD section of your last paystub to help you go through the questions. The more questions you can answer the more precise the estimate. At the end of the process, the estimator will suggest the number of allowances to claim on your W4 form to get on track. If you find you may be getting a refund, you may decide to do nothing. When you get it, try to save at least half of it.
OK, you are done! Feel good? Now it’s soccer practice time! Just kidding, find something fun to celebrate the progress you made!
Until next time!
Massi De Santis is an Austin, TX fee-only financial planner. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.
