There is nothing more special in this world then meeting your baby son or daughter, or grandson or granddaughter, for the first time. As you get settled into life with the new baby, you may ultimately start thinking about the future and financial responsibilities that come along. Such concerns may include putting a will in place, updating your life insurance, and saving for college as a FDNY member.
The thought of saving for college as a FDNY member can be daunting when faced with the exorbitant costs of sending a child to college today, even if they qualify for some scholarships or financial aid. Typically, the best place to get started is somewhere and to begin developing good habits. We often advise our clients to come up with a starting monthly number that they can save that works within their budget … such as $50/month or $200/month from their FDNY salary. By starting somewhere, you begin the habit of savings for college and the corresponding positive feeling of seeing an account start to grow. Over time you can look to increase the monthly savings, and two ways to do this would be to make an increase once every year, or at every time there is a pay raise – even if it is by an additional $25 or $50/month. Additional funds can be saved at different times in the year such as if there is a tax refund, overtime pay from the FDNY, the child’s birthday, and around the holidays.
Where to start saving for college education for FDNY members?
If you want to start saving for a child’s college education where would be the best place to do so? One option would be to open a savings account at a bank or a high yield online savings. As of the time this article is written in October 2022 you could earn around 2% in an online high yield savings account. Another option would be to buy savings bonds from the US Treasury, one type is the
Series I savings bonds which allow your savings keep pace with the general level of inflation. The preceding options are for those who are more conservative and are willing to give up growth potential to avoid taking risk. A downside to this strategy is that the savings may not keep pace with the increasing costs of college and may not produce a net positive return above inflation.
To give context to the impact of long-term returns on savings, I have calculated a couple of scenarios. If someone were to save $200/month from when their baby is born and for the following 18 years they would have a final balance of roughly $52,034 if they were to earn a 2% interest rate, and $96,657 if they were to earn an 8% interest rate. Of course, there are risks to consider, and investments do not move up in a straight line, but this gives some idea of the impact of the growth rate and of compounding returns.
For those who are comfortable with investing their savings to try to achieve positive returns net of inflation most often you would be looking at stock and bond portfolios. One option would be to open an investment account on your own, or with a financial advisor, and purchase individual stocks, ETF’s, and/or mutual funds. One downside to this option, alongside the previous options, is that taxes will be owed on interest, dividends and capital gains. An alternative option that provides upside growth potential of the markets but with the potential to avoid taxation is utilizing a 529 college savings plan.
What is a 529 Plan?
With a 529 college savings plan you may eligible for a state income tax deduction for contributions, have the account grow tax-deferred during the savings years, and then access the funds tax-free if used for higher education. Higher education includes an accredited college, university, vocational or technical school, as well as a certified and registered apprenticeship. If your child does not end up using some or all of the 529 plan account for higher education, you can change the beneficiary to another child or member of the beneficiary’s family. If ultimately there were funds were not used for higher education and withdrawn, then the owner may be subject to owing taxes on the growth within the account, as well as a penalty on the growth in the account. This may be a great option for FDNY members who want to start saving for college.
All of the above account types – online savings account, U.S. savings bonds, investment account and 529 savings account – all count the same when it comes to student aid qualification. An asset held in the name of the parent as the owner, and in the case of a 529 with the child as the beneficiary, has a lower impact on financial aid, compared to if a child owned the account in their name. Another option for FDNY members of a certain age is to potentially use a Roth account, which has its own set of pros and cons that needs to be assessed individually.
What Should FDNY Members Do?
Given there are so many considerations when it comes to saving for a child’s higher education, and that the best time to start saving is as early as you can, we would advise you to work with your tax and financial professionals to decide which option(s) work best for you. If you would like to talk to someone on our team about your options we would be happy to schedule a time for you to talk with one of us. On behalf of our advisor’s alma maters, go Terriers, Blue Devils, Wildcats, and Blue Hens! Wishing you and your family financial success!