By MATT BLOIS
This fall, students from all over Williamson County packed clothes into trash bags, filled a milk crate full of books and drove off to college, leaving their crying parents behind.
It’s a time-honored tradition—one that involves multiple trips to Target and teaching teenagers how to wash their laundry.
It also requires a lot of financial planning.
The Home Page recently talked with Jeff East, a wealth manager at Pinnacle Financial Partners’ Brentwood office, to learn how parents can save for college. Here are five things you need to know.
1. You can save for college without paying taxes on the returns
Parents can save money for college without paying taxes on the returns by investing in a 529 plan. Family members can contribute $15,000 a year without incurring a gift tax, and the money grows tax free.
As long as parents use the money for educational expenses they won’t have to pay taxes when they spend it. Educational expenses include things like tuition, books, equipment and housing.
2. You can use a college savings plan for K-12 tuition
Previously, 529 plans could only be used to save for college. This year, the federal government changed the rules so that families can spend the money on tuition for private school from kindergarten through high school.
“They have some stricter guidelines on it than the college expenses do,” East said.
Parents can spend up to $10,000 a year, and they have to spend it on tuition. They can’t use it for other expenses like books or technology.
3. All family members can contribute to a college savings plan
Saving enough to pay for college tuition alone is difficult. Asking family members to chip in makes it a little bit easier.
Any family member can contribute up to $15,000 to a 529 plan without paying a gift tax. Two parents can contribute $30,000 each year, but four grandparents could potentially contribute an additional $15,000 each year.
Investors also have the option of contributing five years all at once without a tax penalty. Each parent could contribute $75,000 at the start of the fund, which would help it grow faster.
“You would have that larger nest egg to grow,” East said. “Especially for the K-12 private schools, funds might be needed earlier.”
4. You can start saving as soon as your child is born
Parents can start saving for college as soon as they have their child’s social security number. Starting early makes it easier to build up the fund before a child goes to school.
East said it’s best to start early, but added that parents should probably make sure their own retirement funds are in good shape first.
“A mentor of mine told me … there are scholarships out there for your kids and your client’s kids to go to college,” he said. “There’s no one that’s going to be there when you’re 65 to lend you money to retire on.”
5. You can pass on a college savings account
A college savings plan can be a good way to pay for college tuition for multiple children or even multiple generations. If one child has money left over parents can change the beneficiary of the fund to another child.
Eventually, families can even pass these funds down to the next generation. The Internal Revenue Service prohibits skipping generations, but the funds can last a long time.