College Costs: Unexpected Stats about Saving (Part 2)

Mistake 1: Paying taxes on college saving income

At Ambassador Advisors, we want you to take advantage of tax-free growth opportunities for college savings.

23% of students attend a four-year school because they believe that’s what it’s expected of them, and 30% choose to attend a four-year school because they believe it is the natural “next step” after graduating high school. With so many students heading to college and the outstanding loan debt at $1.48 million, it’s more important than ever for you to find ways to boost your college savings income.

If you are paying taxes on your personal college savings income, you could possibly be missing out on up to 25% of additional money specifically for higher education.

According to the Journal of Financial Planning, 45% of families are keeping funds for higher education in taxable accounts – this means that those families are paying taxes on those funds that technically are completely avoidable.

In a hypothetical example provided by the Journal, a CA ScholarShare 529 plan, there was a contribution of $5,000, monthly contributions of $50 for 18 years, and a yearly return of 7% compounded monthly at a rate of 7.23%. Taxes were assumed paid in a lump sum, at the end of the accumulation period. State taxes are not federally deductible.

Ultimately, the taxable account was worth nearly 25% less than the 529 plan. This is incredibly substantial – as every dollar counts when saving for college – and a tax-free growth opportunities is the ideal choice for many parents planning to help their children pay for college.

Source: Journal of Financial Planning, FPAJournal.org “6 Steps Students Should Take Before Choosing a School”  January 2020

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
Potential investors of 529 plans may get more favorable tax benefits from 529 plans sponsored by their own state. Consult your tax professional for how 529 tax treatments and account fees would apply to your particular situation. To determine which college saving option is right for you, please consult your tax and accounting advisors. Neither APFS nor its affiliates or financial professionals provide tax, legal or accounting advice. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest. Investments in 529 college savings plans are neither FDIC insured nor guaranteed and may lose value.