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Saving for College? Here's What Frontier Bank's Wealth Advisors Recommend

Aug 31, 2020 10:17AM ● By MED Magazine

There is no doubt that 2020 has been an uncertain year for colleges across the US as higher education grapples with the implications of a global pandemic. But one thing that continues to be a certainty is the long-term value of a college education.

"The data is pretty convincing that people with four-year degrees are going to earn more over their lifetime than someone who has a high school degree," says Brad Lupkes, a wealth advisor in the Wealth Management & Trust department at Frontier Bank. "Unfortunately, there is a lot of cost that goes along with getting that degree."

In the 2019-2020 school year, the average tuition at a 4-year public university stood at around $22,000. With an average inflation rate of 6 percent, a child born today could expect to pay about $60,000 a year by the time they're 18. Lupkes says it is possible that a shift toward more online learning could reduce those numbers slightly. Either way, most parents will need a plan to save for college. And the earlier they start, the better.

While there are several ways to save for college, Lupkes says a 529 plan is by far the best tool. A 529 plan is a tax-free savings account that is strictly for educational expenses. (Funds withdrawn for any other reason incur a 10 percent penalty - and the owed taxes.) Qualified expenses can include tuition, books, room and board, computer hardware and software, and other school supplies. Funds can even be used for K-12 private school tuition.

"The main benefit of a 529 plan is that that money is going to grow tax free. When you pull that money out, you do not owe taxes, as long as you use it on education," says Lupkes.

Parents considering setting up a 529 plan may wonder what happens to that money if their child receives a scholarship or even decides not to attend college. Lupkes says the funds could be used for post-graduate work later. Another option is to change the beneficiary. The account can be transferred to a sibling or even a grandchild without penalty or fees.

South Dakota, Iowa and Minnesota all offer 529 plans. Some states with a state income tax even offer tax credits to residents who enroll in that state's plan. The beneficiary does not have to attend college in that state. 

"If someone came in wanting to set up a 529 plan, the first thing we would do is see if their state offers one and whether or not there are tax credits offered," says Lupkes. "If it does, it often makes sense to set up the plan in that state. Either way, it is our job to go out and find the best 529 plan for their particular situation."

Like a retirement plan, many 529 plans are designed to automatically adjust the investment strategy based on the age of the child. The investments may be more aggressive when the child is young, becoming less so as they approach college age. Lupkes can help clients choose and set up a plan, review the investments offered, and decide on savings goals. 

"I have reviewed several different plans and even I tend to use the guided options. It is very cost effective. I think it is a great way to invest," says Lupkes.

But there is at least one other way. A custodial account allows the parent to manage the funds for their beneficiary child. Unlike a 529 plan, the money is not restricted to education expenses and could also be used to help pay for things like a vehicle or a home. This type of account does not offer the tax incentives of a 529 plan.

To learn more about how Frontier Bank can help you plan for college, contact the Wealth Management and Trust Department.

Frontier Bank Wealth Management  Trust - Sioux Falls SD

Frontier Bank Wealth Management & Trust

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