Planning for Young Orinda’s College
As another crop of Miramonte grads prepares to disperse to universities across the country, the reality of college expenses is coming home to roost for some of their families.
Most inquiring Orinda families learn that financial aid for them only comes in the form of loans. Need-based grants and scholarships taper off greatly just above the poverty line.
Many Orindans also find themselves without tax breaks to lighten the blow. The American Opportunity Tax Credit and Lifetime Learning Credit offer $5,500 in tax breaks but begins phasing out at $59,000 of income for single filers.
One very powerful tax break remains undiminished for all income levels: the 529 plan in which savings and earnings can be withdrawn tax free for qualified educational expenses.
One caveat to this opportunity is that you need to have money to put in while there is still time for it to grow. It doesn’t help to put money in and take it out immediately because the tax break is only on the earnings in the account.
The tax benefit can be huge if you invest funds before your student graduates from TOPS, St. Stephen’s or Fountainhead preschools. The benefits will be less if your student is already a Matador, though that may be an easier time for some families to come up with the money.
The ideal level of funding for a four-year old depends on many unknowns. It’s hard to know if that impressive crayon work will lead to a prestigious architectural degree. That’s before throwing in a host of external factors, like school price inflation, policy changes and market returns.
The main risk of putting too much in is a 10% penalty on the earnings if withdrawn for non-qualified expenses. The rules are many, but this risk is mitigated somewhat by the ability to transfer the account to a different beneficiary, siblings or some other family members. If a student might qualify for financial aid, the titling of the account is important.
The risk of putting too little in is that you might miss out on a better tax break. Overall, the chances that young parents perfectly fund expenses over a decade away looks slim, but the benefits of getting started to some degree are often worth it.
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