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College Planning Considerations for Law Enforcement Officers

Drew Hancock

Director of Financial Education

Last Updated
May 09, 2022
Female police officer with 3 teenage children

6 Tips to Help You Save for Your Children’s Education Expenses

It’s no secret that the cost of a college education is getting more expensive. On average, college tuition increases at a rate of 8% each year. That means the cost nearly doubles every nine years.1 This fact alone can make saving for your children’s education expenses seem like an overwhelming task. Whether you plan to pay the full cost of your kids’ college education or wish to support them in a smaller way, the following strategies can help you save.

Tip #1 – Plan for your retirement first.

You may find it strange that our #1 tip in a college savings article is to plan for retirement, but hear us out. There is a 100% chance you will retire someday. There’s also a chance you may be forced to retire early due to an injury on the job or other unexpected circumstances. You need to make sure your family is protected.

Even if you believe there’s no doubt your kids will attend college, there are still multiple ways to fund a college education. But you only have one chance to retire. Plus, if your kids decide not to attend college and you have put a large chunk of your savings into a tax-advantaged college savings account, you may find yourself with a lot of college savings but not enough retirement savings. And you would likely face penalties for using college savings to fund non-education-related expenses.

Bottom line – develop a focused education savings plan, but only after you’ve planned your retirement.

Tip #2 – Open a 529 college savings plan.

A 529 plan is a college savings investment account that can help you save for education expenses with certain tax benefits. Earnings in a 529 plan can be withdrawn tax-free at the state and federal level when used for to pay education-related expenses.

For example, say you contribute $30,000 to a 529 plan. Due to investment growth, the value of the account increases over time to $45,000. Typically, the $15,000 of growth would be taxable, which would then decrease the total amount available to pay for college. However, if you use the $45,000 for education expenses, you can avoid tax on the $15,000 in earnings.

Be aware, however, that if you use 529 assets for anything other than qualified education expenses, you’ll be subject to federal income taxes as well as a 10% penalty on any earnings.

Tip #3 – Choose your investments carefully.

529 plans allow you the flexibility to choose how funds are invested, but it’s important to choose wisely. The younger your child is, the more exposure you can have to growth investments, such as stocks. And as your child nears college, you’ll likely want to shift exposure to more conservative investments in order to protect against an unexpected market drop at an inopportune time. Many plans offer age-based investment options that focus on growth in the early years and become more conservative as the child approaches college age.

Your wealth manager can help you choose a 529 investment mix that is in line with your college planning goals and overall investment portfolio.

Tip #4 – Start saving early.

As with most financial goals, the earlier you start saving the better. A child can be listed as the beneficiary of a 529 plan as soon as his or her Social Security number is issued. If you want to start even earlier, you can open a 529 plan in your own name when you’re expecting and change the beneficiary to your child after he or she is born.

Regardless of when you establish the 529 plan, it’s important to have a clear plan for saving. Determine whether you’ll contribute every month or at a set time each year. If you make a monthly contribution of $200 for 10 years with a 6% annual growth rate, you’ll have $30,000 in savings.

Tip #5 – Watch out for fees.

High fees can quickly erode growth in your college savings plan, which is why it’s important to look for high-quality, low-cost investment options. This may mean investing in index funds, which are generally the least expensive. Historically, index funds have had a high probability of outperforming actively managed (and more expensive) funds over the long term. Also, be cautious of 529 plans offered by a broker, as these often include a “load,” or broker’s commission, of up to 5%. This expense greatly cuts into your savings potential.

Again, your wealth manager will work with you to implement a low-cost college savings strategy that helps you achieve your specific goals.

Tip #6 – Involve family and friends.

When friends and relatives ask what they can buy for holidays and birthdays, encourage them to contribute to your child’s 529 plan. Grandparents can even open their own 529 plan and designate your children as beneficiaries. If they live in a state that offers tax deductions for contributions, grandparents can receive the tax savings today and your children can benefit from the contributions’ future growth.

As your children get older, show them their 529 plan investment statements, and discuss how you and other family members are saving for their future. It’s a great lesson on saving, investing and the value you place on their future education.

Are you ready to start saving for your children’s college education? Creative Planning Law Enforcement can help. We understand the unique challenges faced by law enforcement officers and take a comprehensive approach to helping you plan for the future by integrating all aspects of your personal financial life into a single, comprehensive plan. We’re here to help you achieve your goals, whatever they may be.

If you’d like help planning for your children’s college education, or with any other financial matter, please schedule a call.

Footnotes:

  1. https://finaid.org/savings/tuition-inflation/
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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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