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Financial Q&A: Money Tips for Couples and Families

Money Girl answers 3 questions about family finances, including saving for college, using joint accounts, and co-signing loans. Plus you'll get a bonus Q&A about using credit cards with the newest technology. 

By
Laura Adams, MBA,
Episode #412
Financial Q&A: Money Tips for Couples and Families

If you think having a successful financial life is challenging as a single, whew, does it get more complicated when you add a partner, spouse, or children to the mix!

In this episode I'll answer 3 questions about family finances. We'll cover saving for college, using joint accounts, and co-signing loansplus, I'll answer a bonus question about credit cards that clarifies information from a recent podcast.

How to Save for a College Education

Question #1: Michael A. asks, “What’s the best way to save for a child's future college expenses, a 529 plan, a traditional IRA, or a Roth IRA?”

Answer: 

The best choice for college savings is a 529 plan. Not only does it give you major tax advantages and a high contribution limit, but it also gives you the most control over the money.

These accounts allow you to save for college in two ways: using a prepaid plan or a savings plan.  

With a 529 prepaid plan you pay for tuition at a state school ahead of time. That means you get tomorrow’s tuition at today’s prices. Since the cost of college continues to skyrocket every year, this prepayment strategy should save a lot of money.

But what if your child wants to go to a different school? Well, you have options. Funds in a prepaid plan may be withdrawn so you can use them at an out-of-state school or a private college. However, you may not get the full value out of the plan because you’ll generally have to make up the tuition difference. 

With a 529 savings plan, you invest contributions in a tax-deferred account. This is similar to a retirement account, where you choose investments from a menu of options and your account value fluctuates based on their performance.

As long as the funds are used to pay for qualified education expenses, such as tuition and room and board, the earnings in the account are not subject to federal or, in most cases, state tax.

Savings plans are offered by states, not schools, and they can be used at any accredited school in the country, and even at some foreign institutions. For instance, you could live in New York, participate in a Florida 529 saving plan, and use the money to pay for a school in California.

Most states offer at least one 529 plan; however, the fees and benefits, such as the maximum contribution limit and investment options, vary. So do your homework and compare plans across the country using a site like Savingforcollege.com.

As long as the funds are used to pay for qualified education expenses, such as tuition and room and board, the earnings in the account are not subject to federal or, in most cases, state tax. Plus, some states offer tax deductions or credits for residents who choose in-state plans.

But if you use 529 funds for anything other than qualified education expenses, your earnings will be subject to income tax, plus a 10% penalty. So never contribute more to a 529 than you believe your child will need for the total of his or her education expenses.

You can even have both a 529 prepaid plan and a savings plan. The prepaid account would pay for tuition and the savings plan could be for other expenses, such as room and board, books, supplies, and computer equipment.

To sign up for a 529 you can go directly to the plan manager or use a financial advisor. Using an advisor may cost a little more, but may be worth it if you’re new to investing.

See Also: 6 Tips for Finding a Trustworthy Financial Advisor

Once you’re enrolled, you can link your 529 saving account to your bank account and set up automatic monthly deposits. You can even ask friends and family to make contributions to the account, instead of buying birthday or holiday gifts for your child.

Michael also mentioned the option of using an Individual Retirement Arrangement or IRA for college savings. You can use a traditional or Roth IRA to pay for college.

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