Saving for Education
The National Bank of Indianapolis
Commentary by Dave Franklin, CFA, CMT, Vice President and Chief Investment Officer, Diamond Capital Management
Students of all ages are back to school. If you have children with college ambitions, it is never too early to start saving. With some private institution tuition topping off at almost $60,000 per year, a four-year degree can add up quickly without financial aid or scholarships. Vice President and Chief Investment Officer for Diamond Capital Management, Dave Franklin, encourages everyone to start early, “The thought of paying for college can be intimidating and stressful. We recommend starting as early as possible to benefit from the effects of compounding returns. Plus, with a longer time horizon, investments can be more aggressive early on to, hopefully, generate a higher rate of return.”
One of the most popular ways for Hoosiers to save is through Indiana’s CollegeChoice 529 Savings Plan. The real benefit, beyond earning investment gains, is the tax benefit. Contributions grow without taxes and distributions are tax-free if used for qualified education-related expenses. Plus, Indiana taxpayers may receive a state income tax credit equal to 20% of their contributions to a CollegeChoice 529 account, up to $1,000 per year ($500 for married filing separately) through December 31, 2022. Contributions by Indiana taxpayers made on or after January 1, 2023, will qualify for the 20% tax credit, with a new maximum of up to $1,500 ($750 for married filing separately). When it comes time to withdraw funds for college, the money can cover tuition, books, housing or any other education-related expenses. CollegeChoice 529 plans can be self-directed, or you can utilize a 529 Advisor plan which allows you to work with a professional investment advisor.
Other ways to save and invest for college include a regular investment account, a Roth IRA, and a Coverdale Education Savings Account. The Roth IRA is a post-tax retirement account that grows tax-free but does allow for the withdrawal of funds for education without penalty before the age of 59. However, you will pay income taxes on any earnings. Roth IRAs have a $6,000 annual contribution maximum and parents are not eligible if they earn more than $214,000.
Since the beginning of 2022, the gift tax exclusion amount increased from $15,000 to $16,000; individuals can invest up to $16,000 ($32,000 for married couples) per beneficiary without incurring gift tax consequences. Alternatively, individuals can now contribute up to $80,000 per beneficiary in a single year ($160,000 for married couples) and take advantage of five years’ worth of tax-free gifts at one time. This would be helpful if you are trying to play catch up on college savings. A special election is made on Form 709 which is filed in each year of the five years.
Because everyone’s tax situation is unique, we recommend consulting your tax advisor to determine how each of these strategies may affect you.
There are several ways you can save for college. Regardless of which method you choose, it is important to start as soon as possible to benefit from the effects of compounding returns. Franklin adds, “Just like saving for your retirement, saving for your child’s college expenses is best accomplished in tax-advantaged accounts with the benefit of time in the markets. Don’t sacrifice your retirement savings for your child’s college savings and remember that it is never too early or late to start saving. The key is having a plan.”
At The National Bank of Indianapolis, our Private Bankers have the experience and knowledge to help you develop a plan that is best for you. You’ll receive personal attention from one of our specialists, dedicated to helping you reach your goals.
Learn more about the benefits of Private Banking: