Besides personal retirement, for most people, their second largest investing goal is their children’s college education. Let’s uncover the cost, tax breaks and right way to save for this expense.
Current college costs might cause some sticker shock. The national average four-year in-state cost is just under $27,000 per year. University of Wisconsin-Madison is right at the national average while UW-Milwaukee is $24,600 and some of the smaller schools like Whitewater are less than $20,000. Private and out of state schools are roughly double, although there is a wide range of prices. For instance, Northwestern University costs $81,200 annually.
There are some tax breaks to help cover the cost. The most lucrative is the American Opportunity Tax Credit, which is worth $2,500 per student for four years, equaling $10,000. Unfortunately, those with an adjusted gross income that exceeds $90,000 single or $180,000 married are ineligible. The second tax break is found on the Wisconsin tax return for contributions to Edvest, Wisconsin’s 529 college savings plan. In 2021, contributions up to $3,380 per beneficiary (child) are subtracted from Wisconsin taxable income. There are tax breaks after school too, notably the student loan interest deduction.
The right way to save for college is through a 529 plan. While taxpayers can use another state’s plan, Wisconsin’s Edvest 529 is a highly rated plan according to savingforcollege.com. All 529 plans provide tax deferred growth and tax-free withdrawals for qualifying education expenses. Those expenses include tuition, room and board (or equivalent off campus housing) and even items like a computer and internet. For a college-bound child, this is the best place to save.
What if a scholarship or other funding comes along and the money isn’t needed for college expenses? The beneficiary can be changed to another child, grandchild, niece, nephew, yourself, pretty much anyone in the family tree – including in-laws. The money can also be taken out of the plan for noneducation expenses. The portion of the distribution that represents investment growth would incur income taxes and a 10% penalty while the portion that represents the initial contribution is tax free and penalty free.
How much do you need to save? Edvest provides a helpful calculator to crunch the numbers.
Would you like one-on-one advice about your finances? Please contact Mark Ziety, CFP®, AIF® 608.442.3750 to get started.
Mark Ziety, CFP®, AIF®
WisMed Financial, Inc. part of the Wisconsin Medical Society
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