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I’m Second-Guessing the Approach We’ve Been Saving for Stepdaughter’s School

Expensive Penny,

My stepdaughter simply began center faculty. We’ve put some cash away for her school schooling already, however very absentmindedly — checks from family and occasional small deposits have gone into a normal financial savings account. We’ve at all times postpone sitting down and making a particular plan. However it seems like time to get severe now. The child’s shaving her legs, for God’s sake.

We’re very fortunate to have the budgeting finish of issues down. Barring monetary emergencies, we should always have the ability to save sufficient to cowl most projected tuition prices. What my spouse and I can’t work out is the place to place these financial savings. We’ve thought of a 529 financial savings plan. However the tax on withdrawals not associated to schooling makes me nervous.

In any case, there may be a lot uncertainty forward. My stepdaughter does very nicely in class. What if scholarships handle most or all of her tuition? What if she decides to remain near residence and we don’t want as a lot cash as we projected? Is there a wiser option to save for faculty when you don’t understand how a lot you’ll want? Is there a bonus to 529 plans that I’m lacking?

-Frank

Expensive Frank,

We giggle about saving for faculty when youngsters are very small. They’re little bundles of pleasure who merely must be fed and clothed. Why fret about what’s going to occur 18 years from now? After which, rapidly, they’re not small anymore. They develop like very opinionated weeds and have their very own senses of humor and factors of view. And physique hair.

I can think about you’re not the one father or mother quietly panicking at this as you look over your stepdaughter’s shoulder attempting to decipher how they’re instructing math as of late. This very far-off life occasion isn’t truly that far off.

The excellent news is that you just’re saving. The unhealthy information is that your cash most likely isn’t working exhausting sufficient for you whereas it waits in your stepdaughter to make some massive choices about her future.

A 529 financial savings plan is a stable possibility as a result of it’s a tax-free funding account. However the penalty is steep for these non-educational withdrawals: a 10% penalty on prime of revenue tax. Nevertheless, it’s essential to notice that these funds can be utilized for nearly any academic endeavor, and you may change the beneficiary on the account within the occasion she doesn’t want all the cash.

An alternative choice is a custodial account. So long as the account earns lower than round $2,100 per yr, the earnings are taxed on the baby’s price as a substitute of the dad and mom’.

One of these account can negatively have an effect on how a lot need-based monetary support she’s eligible for when she applies to high school. However the advantage of a custodial account as a school financial savings plan is that she will get management of the cash when she’s 18. That may sound scary proper now with a brand new teenager in the home, however it signifies that if she chooses to not go to varsity, she will nonetheless use that cash towards her future monetary safety.

Each methodology of saving for faculty — from 529s to financial savings bonds to stuffing money underneath the mattress — could have drawbacks. At this level, what’s important is that the cash you’ve already saved will get into an funding account of some type. When the time rolls round — oh, and it’s about to roll round — you need that cash to stretch so far as it probably can.

Have a difficult cash query? Write to Expensive Penny at https://www.thepennyhoarder.com/dear-penny

Lisa Rowan is a private finance professional and senior author at The Penny Hoarder, and the voice behind Expensive Penny. For extra sensible cash ideas, go to www.thepennyhoarder.com.

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