6 Things You Need to Know about Starting a College Fund for Your Baby

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So what happens when you find yourself inadvertently running to a professional financial advisor while on a business trip and you happen to have four young children and have been majorly stressing out because you haven't started any savings for their college?

You get some great free advice, that's what.

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I recently had the opportunity to chat with Daniel Demers, a financial associate with Thrivent Financial, and he broke down the ins and outs of how to start a college savings fund for your baby.

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1.Understand that college is only part of the picture

“Most parents usually know they should be eliminating debt, creating and following a budget, saving for retirement, considering helping their children with college, and having the right amount of life insurance,” Demers noted, but he frequently sees parents in the same situation that I am currently in:

Not knowing where the heck to start.

“Because the individual circumstances of families vary (e.g. parent age, number and age of children, financial circumstances, present and long-term family financial goals, etc.) I generally suggest that saving for college is a really good idea as long as it occurs in a planned fashion that fits within the evolving capacity of the family to fund on a regular basis,” he explained.

Which means it's generally helpful to get started earlier rather than later and to give yourself permission to work college savings into your family's entire financial picture. I think this is such great advice because I hadn't really thought of it that way. It doesn't make much sense to pour money solely into my kids' college funds if the rest of our family's financial health is suffering, right?

Which is why Demers recommends starting with a few basic questions …

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2. Have a good idea of what your goals are

Instead of recommending a blanket dollar amount for parents to aim for in college savings for their kids, Demers advises families to first figure out what their goals are when it comes to college.

“For example, ‘What percentage of your child's education would you like to pay for?' ‘About how much does that school cost today?' ‘What is the current age of your child?' ‘How much do you think college tuition costs will increase each year?' and ‘How much risk are you willing to take on this investment?' ” he explained.

Demers uses their goals and tools, such as a college savings calculator, to come up with a number to aim for, but he also says that families, parents, and their advisers should be aware of how any savings and future distribution strategies for college may impact their financial aid eligibility as well as their retirement, emergency funds, etc. “This understanding becomes even more critical when families have more than one child in college at the same time,” Demers said.

Side note: Is anyone confused right now? I tend to get major foggy brain in these types of conversations, but basically, it's important to know what your college savings plan will do to your kid's financial aid package and also to you, which I guess is kind of a big deal, guys.

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3. Open up an investment fund

So there are three major options for starting a college fund for your child, the first of which is an investment fund, such as a Roth IRA, which can be an option to grow your money tax-free. “Tax advantages are a major factor when people are considering college funding,” Demers said. “Also, if people can receive a tax deduction for adding money to an IRA and allow their dollars to grow tax-deferred and pay taxes on the distribution, this can also be an advantage.”

He notes that, in general, whichever investment professional you are working with should be asking for your tax returns and reviewing options with you so that if you're not cool with playing the stock market, there are fixed options available, too.

Demers also recommends that each parent take the time to understand the fee structure of the investment they are considering. “From a college planning perspective, we generally recommend using savings vehicles first that provide flexibility for the owner, since people typically do not know for sure well in advance what exactly circumstances might be when their child arrives at college age,” he said.

He explains that a Roth IRA fund can make sense if you 1) think your child may not go to college, 2) are not sure how much you want to give to your child, or 3) if your child is able to get school paid for in one way or another.

But if you do rely on Traditional or Roth IRAs in your college funding plan, it is important to understand that while withdrawals may be tax free or taxable without the extra 10% penalty (which is the case when taking funds for education from a traditional IRA or Roth before the age of 59 1/2) , those withdrawals may have an adverse impact on a student or their sibling's need-based aid eligibility by increasing Mom and Dad's income for financial aid.

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4. Start up a 529 plan

A 529 plan is a savings plan specifically designed for college funds. Each state has their own 529 plan, and there are also a number of private 529 plans out there that are not affiliated with any particular state, Demers said. “What some people don't know is that if they like a different state's plan they can use a different state's plan, and plans may be investment-based plans (using mutual fund investments) or pre-paid plans that purchase units of tuition at today's prices for use in the future when those units are expected to be more expensive than they are today,” he explains.

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However, he does have a warning about using a 529 plan, noting that if there is a state tax deduction available, they may be forfeiting these small tax deductions by using another state's plan. Also, unless you use the 529 money for college, taking the money out will result in a tax fee and a 10% federal tax penalty, so it's a big “What if?” if your kid doesn't end up going to college. Demers recommends talking to a tax professional when discussing individual tax implications.

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5. Cash life insurance

“I bring this up because, in general, I find that most people are underinsured to begin with, and when people are planning for their future, a strong case can be made to carry some life insurance into retirement and for uses in legacy planning,” Demers explained.

This option works by either growing the cash value at a fixed rate or a rate based on the performance of the market. Then, when the cost of insurance is deducted from the earnings, the remaining balance is available for withdrawal or in the form of a loan from the policy. “The dollars grow tax-deferred and may come out tax-free in either a withdrawal or a loan,” he said. “Of the three options, this option is the most complicated, but it has enough advantage that I take time to mention it.

“Something to note, however, is withdrawals and surrenders from cash-value insurance policies might in fact have an adverse impact on a student's need-based aid eligibility; loans against a life insurance contract do not. Distributions of funds from the various identified savings vehicles affect financial aid calculation variously.”

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6. Meet with a financial guru

Are you sufficiently overwhelmed now?

Fear not, fellow parents. All you really need to know is what you hope for your baby's college and how you can get there from where you are now. Demers, of course, recommends meeting with a financial professional who has access to resources and college planning expertise.

Look for “someone who is holistic in their approach, who will help you consider your current debt(s) and how to manage them, your current risk protection (life insurance, disability income, employee benefits, cash flow, and emergency funds) and is able to help you balance funding these things and helping you save for college and retirement,” he explains. “Life is about balance and no decision should be made without these other factors being considered.”

What do you plan do to for your baby for college savings?

Disclaimer from Thrivent Financial:

Insurance products issued or offered by Thrivent Financial, the marketing name for Thrivent Financial for Lutherans, Appleton, WI. Not all products are available in all states. Securities and investment advisory services are offered through Thrivent Investment Management Inc., 625 Fourth Ave. S., Minneapolis, MN 55415, a FINRA and SIPC member and a wholly owned subsidiary of Thrivent. Thrivent Financial representatives are registered representatives of Thrivent Investment Management Inc. They are also licensed insurance agents/producers of Thrivent. For additional important information, visit Thrivent.com/disclosures. If requested, a Thrivent Financial representative may contact you and financial solutions, including insurance, may be solicited.

Thrivent Financial for Lutherans and its respective associates and employees cannot provide legal, accounting, or tax advice or services. Work with your Thrivent Financial representative, and as appropriate your attorney and/or tax professional for additional information.

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6 Things You Need to Know about Starting a College Fund for Your Baby

Chaunie Brusie is a coffee mug addict, a labor and delivery nurse turned freelance writer, and a young(ish) mom of four. She is the author of "Tiny Blue Lines: Preparing For Your Baby, Moving Forward In Faith, & Reclaiming Your Life In An Unplanned Pregnancy" and "The Moments That Made You A Mother". She also runs Passion Meets Practicality, a community of tips + inspiration for work-at-home mothers. ... More

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