Financial Advice I Would Give My Younger Self – Education Finance Planning


At the end of most talks I give, the moderator usually asks, “What else should our audience know?” I always look at the younger members in the room or on screen and think – if only I knew when I was your age.

Although my business is to provide financial and wealth planning advice to clients who have already built up significant wealth, there are many fundamental planning strategies that apply to those just starting out in their careers, things that , frankly, I wish I had known when I was growing up. Therefore, I’m writing this four-part series about the planning advice I would give to my younger self. Topics will range from planning for education savings, young families, retirement, to caring for aging parents. This first article is about planning for education savings.

Saving for college is often viewed from the perspective of the parent saving for the child, and if you’re one of the lucky ones whose parents can afford to have done it for you, good for you. However, education savings, or more accurately education savings, is not strictly a parent-to-child domain. As a young adult, you can start thinking about saving for college and how to do it in a tax-efficient way. Specifically, I’m referring to a 529 college savings plan and a Roth Individual Retirement Account (IRA).

529 College savings plans aren’t just for kids

The 529 Education Savings Plan is a tax-efficient vehicle designed for education savings. Money held in these accounts can grow with income tax deferral, and when the money is ultimately distributed for the use of eligible educational expenses, it will also be exempt from income tax. In other words, income and appreciation of investments held in a 529 account can be completely exempt from income tax if used for educational purposes.

For many, the first experience with a 529 account is when a young parent opens one for a newborn – this was certainly my case as my first 529 account was opened for my son a few months after he was born. Here is the advice I wish I had known years ago – you can open an account for yourself. Instead of putting your extra savings early in your career into a savings or investment account where interest and growth would be taxable, instead consider putting those savings into a 529 account for your own benefit. If you pursue higher education, you can then use this money to pay for tuition, books, and room and board. As with any tax-advantaged account, the compound growth value of tax-free income can be a nice boost to the bottom line. Additionally, some states also offer a tax deduction or credit on contributions to a 529 account.

You might be wondering — what if I don’t go to graduate school or get outside funding like a scholarship? Money from a 529 plan can still be withdrawn for any use (i.e. non-educational use), but the withdrawal will be subject to income tax at the time of distribution and a 10% penalty if not used for qualifying education expenses. Even so, you can still be a winner, because depending on the growth of the investments and how long the 529 account is open, the value of the compound growth without income tax over the years can outweigh the tax and penalty imposed for making an ineligible withdrawal.

What is more likely, and where the long-term view comes into play, is to view the 529 account as a tax-efficient vehicle not only for your education, but any loved one education. You can rename the beneficiary of a 529 account to an eligible family member (e.g. another child, niece, nephew, in-laws), which means if you don’t ultimately need the money for your own educational purposes, you can effectively “transfer” these funds to another for their own education, while enjoying the same tax advantages.

In retrospect, not only should I have opened a 529 account for my own legal training, but I should have continued to contribute to the account and “transferred” it to my son when he was born as the new beneficiary. If I had done that, I would have jump-started my son’s education savings with 15 solid years of tax-free compound growth.

Roth IRAs aren’t just for retirement

Another tax-efficient vehicle that can be used for college savings is a Roth IRA. These accounts are often thought of for retirement purposes, which is how they are primarily used. The advice I would give to my young person is to consider using this strategy for the financing of studies as well and not only for retirement.

Similar to a 529 plan, income and appreciation from investments held in a Roth IRA benefit from an income tax deferral, with the potential to ultimately be tax exempt. Contributions you make to a Roth IRA are accessible at any time without tax or penalty. Additionally, when profits and growth are distributed from the Roth IRA, they are also exempt from income tax (provided it is a qualified distribution – more on that in a moment) , whatever the use.

The Internal Revenue Service (IRS) also provides a sadnessfree distribution from the Roth IRA to pay for higher education expenses for yourself, your spouse, your children, or your grandchildren, provided that the distribution does not exceed the expenses for the year. Of course, if the assets are ultimately not needed for education, the Roth IRA can ultimately be used for retirement.

There are some key differences between 529 plans and Roth IRAs that should be considered when planning to use either for education savings purposes. The first is in the timing. Although you can make a distribution from a Roth IRA at any time, there will be a 10% early withdrawal penalty if the distribution was made before age 59½, with some exceptions. If a distribution was made within the first five years after a contribution to a Roth IRA, there will also be income tax imposed at the time on the earnings (withdrawal of principal is exempt from income tax) . Therefore, the Roth IRA strategy is probably best considered a savings strategy for a child’s education when you make the withdrawal after the five-year period from the first contribution and after the age of 59. and a half (of course it is also available if one were to obtain higher education at a later age).

Another critical difference concerns income limits. In order to qualify for contributions to a Roth IRA, his income must be below a certain threshold. In 2022, this threshold is $144,000 for single people and $214,000 for married people filing jointly. A 529 plan, on the other hand, has no income limit, so one can make contributions regardless of income level. Therefore, one should be aware of its income potential because if your income starts to exceed the stated threshold amount, the Roth IRA strategy may not be available.

Of course, these two strategies are not mutually exclusive and if there is enough excess savings, you can always contribute to both a 529 plan. and a Roth IRA.

When considering which option is right for you, many other factors are beyond the scope of this article, such as:

  • Investment options available in the plan: 529 Education Savings Plans may offer different investment options compared to Roths and may generally be more limited.
  • Contribution ceilings: If you’re under 50, you can only contribute up to $6,000 per year to a Roth IRA for 2022. Meanwhile, with 529 plans, there are no limits, although taxes on donations may come into play when contributions reach more than $30,000 per couple per year.
  • Impact on financial aid: Income eligibility and qualification varies between 529 and Roth and will depend on many factors such as timing and ownership.

Although you should always consider consulting a financial advisor before making a final decision, I wish I had even known to ask the question when I was younger.

Hope this was helpful, and stay tuned for next month’s column: Financial advice I would give to my younger self — Planning for a young family.

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Note that tax, estate planning, investment and financial strategies require consideration of the suitability of the individual, company or investor, and there is no guarantee that any strategy will be successful. hit. Wilmington Trust is not authorized to and does not provide legal, accounting or tax advice. Our advice and recommendations are provided for guidance only and subject to the opinions and advice of your own lawyer, tax advisor or other professional adviser. Investing involves risk and you can make a profit or a loss. There can be no assurance that any investment strategy will be successful.

Chief Wealth Strategist, Wilmington Trust

Alvina Lo is head of family office and strategic wealth planning at Wilmington Trust, part of M&T Bank. Alvina was previously at Citi Private Bank, Credit Suisse Private Wealth and a practicing attorney at Milbank, Tweed, Hadley & McCloy, LLC. She holds a BS in Civil Engineering from the University of Virginia and a JD from the University of Pennsylvania. She is a published author, frequently lectures, and has been quoted in major media outlets such as “The New York Times.”


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