By the time your toddler gets her degree, a college education could cost more than $250,000. Ray Martin offers tips on how to save now for your child's college tuition.
>> Harry: Twenty years from now according to one estimate a college education could cost more than a quarter million dollars. Now it may be tough to put away money these days but our financial advisor Ray Martin says you should not neglect you kid's college savings plan. Good morning.
>> Ray: Good morning Harry.
>> Harry: There's a brand new study out about how America saves for a college study. What is the headline out of this study this morning?
>> Ray: Okay according to this study folks, parents have had a tough time saving for their children's college education. Going right to the study here they're showing that about 47% are saving the same as last year for the children's college but 33% are saving less than last year and 15% say that they're saving nothing at all. Now in response to the difficult economic environment personal savings rates have shot up to decade's high level --
>> Harry: Wow
>> Ray: here but it hasn't translated to college savings here, okay because of competing economic resources and people are just concerned --
>> Harry: Sure
>> Ray: and cutting back where they can save.
>> Harry: That is kind of an interesting dichotomy isn't it.
>> Ray: There is. Now there's a bright spot here in the survey if we go back to the other screen here is that folks who are saving for their children's college are more confident that they have a plan to pay for that whopping college expense in the future and parents of younger children they're saving it when the kids are about 3 years old and on average parents who have children 7 years or younger about 43% or so are using 529 savings plans which is the best way to save for college. And those who don't use them say about half say they're not at all familiar with them at all so we should talk about them this morning.
>> Harry: So 529's they've been around for a number of years now.
>> Ray: Yeah
>> Harry: Tell us what's so great about a 529.
>> Ray: Okay some of the benefits of a 529 plan, a savings plan here first of all is that there are no income taxes when you save in these accounts. First let's talk a little bit about them too. These are plans set up by states unceremoniously named for the section of the tax code 529.
>> Harry: 529 right.
>> Ray: Where states partner with a mutual fund company, okay, they provide an array of investment options --
>> Harry: Right
>> Ray: and then you save into them, mix your investments in them and then when the money grows it grows tax free and when you take the money out for qualified education expenses it all comes out tax free.
>> Harry: Right
>> Ray: here, so big advantage here.
>> Harry: And especially if you're talking about 20 years from now, a quarter of a million dollars.
>> Ray: That's right.
>> Harry: I mean you need to be --
>> Ray: You really need all the advantages --
>> Harry: All those tax breaks can really --
>> Ray: that you can have. That's a big advantage.
>> Harry: Right, okay.
>> Ray: Another advantage here is that the parent who owns the -- is the account owner and the child never controls the money. So when your child, you know, gets to be age 18 or 21 they --
>> Harry: Right
>> Ray: can't say hey, take that savings now and use it to buy a Corvette or something here.
>> Harry: Right
>> Ray: Like those UGMA or Uniform Gift to Minors Act Accounts work. Here the parent always controls the money so it really plays to the fear that the parent --
>> Harry: Okay
>> Ray: used it for the child's college expenses.
>> Harry: So, okay so the kid isn't gonna run away to, you know, some foreign country.
>> Ray: They never own it the parent always owns it.
>> Harry: But what happens if your kid turns 19 years old and says maybe I don't want to go to college maybe I want to, you know, learn to -- who knows what.
>> Ray: Figure things out our go to public service or they get a scholarship --
>> Harry: Yes
>> Ray: and you don't need the money there.
>> Harry: Right
>> Ray: Then you can roll the account over by changing the beneficiary to a younger child or to another family member or a spouse or even yourself.
>> Harry: Right
>> Ray: You have a lot of flexibility here to name another beneficiary.
>> Harry: Alright
>> Ray: Or you can just withdraw the money as the parent and you will pay taxes on the earnings in that case if not used for education.
>> Harry: This price tag 20 years out is so formidable are there limitations on how much you can put in every year?
>> Ray: You know unlike other savings accounts like Roth IRA's or education savings accounts there are no income limits for 529 plans so no matter how much your income is --
>> Harry: Right
>> Ray: you can use a 529 plan and you can contribute as little as $25.00 a month to many of these plans here.
>> Harry: Okay
>> Ray: So there's none of those issues here. Anybody can use them.
>> Harry: Last but not least.
>> Ray: Yeah
>> Harry: What's the way to find the best one?
>> Ray: Here is my checklist here. Really 3 things to look for. First look for a college savings plan that provides -- provided by your state because about 33 states offer a state tax deduction like New York State allows you --
>> Harry: So --
>> Ray: a $10,000 deduction if you contribute to the New York State plan if you're a New York State resident. Check out your state's plan first. All states offer 529 plans. Don't lose the big idea -- sight of the big idea here.
>> Harry: Performance
>> Ray: Investment performance is key 'cause you're trying to grow your money faster than college inflation rate. And then look for plans that have low cost and fees less than 1% in total costs. If there's one website to go to go to savingforcollege.com you can check out the top 10 performing plans and the top 2 on the list typically come out to the New York State plan and the Utah savings plan. Any parents can use those and pay for college in any state.
>> Harry: It's only a quarter of a million dollars.
>> Ray: Yeah that's right but you need every advantage you can get here.
>> Harry: You better believe it.
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