No one ever said that raising children would be inexpensive. College tuition, fees and other educational expenses have grown at such a rapid rate that they now constitute a family’s second largest major expense (exceeded only by the purchase of the family residence). There are at least two “golden rules” to keep in mind in preparing for this expense:
1. Start Early.
The more time money is invested, the bigger opportunity there is for interest earnings and appreciation. For example, if we assume a total investment return of 8%, one-fifth of a fund created over a five year period consists of investment earnings and the remaining 80% consists of your contributions; on the other hand, if funds are invested over a fifteen year period, almost one-half of the money consists of investment earnings.
2. Take Advantage of Available Tax Savings.
Trying to earn $100,000 or more for one child`s college education may seem daunting, but, consider that federal/state/local taxes may consume 40% of that amount, leaving you with only $60,000. Then as the funds are invested, income taxes take another big bite each year unless proper tax-planning is implemented. For information on how a Section 529 plan may provide very efficient tax-planning, please contact us.
Gathering the necessary funds for educating children is not so simple because there always seems to be other competing goals… paying off medical school loans, furnishing the new home, building a nest-egg for family living expenses or accumulating funds for retirement. That`s why it is not unusual for the most appropriate planning techniques to serve a dual purpose… let`s say creating capital for a family nest-egg AND accumulating assets for college expenses. Thus, while Section 529 plans have become more and more popular, keep in mind that Section 529 plans do have some drawbacks and thus, should not constitute 100% of your planning, in our opinion.
None of the college funding techniques are without its detractions. In order to efficiently accumulate funds for educational expenses, most of the techniques involve income tax planning. However, high-income earners like physicians usually are unable to take advantage of many special tax breaks because of the built-in exclusions. Other tax planning ideas such as state sponsored tuition credit programs will permit physician enrollment but unfortunately, contributions must be invested as the state determines. Gifting funds to children and then investing those assets in the child’s name has been a popular approach, but the danger remains that the child, after reaching maturity, may misuse the accumulation. In summary, the balance here is in finding the income shifting technique that is most appropriate for a physician’s particular family situation.