Back to School, Back to Planning: Financial Lessons for Every Stage

Back-to-school season has a way of reminding parents just how quickly the years pass. One minute you’re buying a backpack for kindergarten, and the next you’re helping pack a car for college.

Along the way, the financial decisions change too.

Whether your child is just starting elementary school, navigating high school, or heading off to college, the beginning of a new school year is a good time to take stock of your education strategy—and make sure the decisions you’re making today support your family’s bigger financial picture.

Young Children: Time Is One of Your Greatest Assets

For parents of younger children, college may feel like a long way off. Financially, that can be a tremendous advantage.

Start—or revisit—a 529 plan

A 529 education savings plan can offer tax-advantaged growth when funds are ultimately used for qualified education expenses. Depending on where you live and which plan you use, there may also be state tax benefits associated with contributions.

But perhaps the biggest advantage for parents of young children is simply time.

Starting early gives contributions more years to potentially compound. And you don’t necessarily need to make large contributions to get started. Regular monthly contributions, annual gifts from grandparents, or directing a portion of birthday and holiday money into a 529 can add up over many years.

If you already have a 529, back-to-school season is a good time to ask:

• Are we contributing enough?
• Should we increase our automatic monthly contribution?
• Does the investment allocation still make sense given our child’s age?
• Are grandparents or other family members interested in contributing?
• Are we balancing education savings appropriately with retirement and other financial goals?

One caution: saving for college shouldn’t come at the expense of your own retirement security. There are multiple ways to pay for education, but far fewer ways to fund retirement.

High School: Turn a Savings Goal Into a Funding Strategy

Once your child enters high school, college is no longer a distant goal. Now it is time to begin putting real numbers around the plan.

Start talking as a family about what college might look like. Public or private? In-state or out-of-state? Four-year university, technical school, apprenticeship, or another path?

The goal isn’t to have everything decided freshman year. It is to understand the range of possibilities and what they could mean financially.

Take inventory of what you’ve saved

Review all of the resources that could potentially be available for education:

• 529 plan balances
• Other savings or investment accounts
• Scholarships and grants
• Expected family cash flow during the college years
• Student earnings
• Financial aid
• Other family resources

Then compare those resources with estimated costs.

This can also be an appropriate time to gradually reconsider the investment risk inside a 529 account. Money needed for freshman year has a much shorter time horizon than it did when your child was eight. Your investment strategy should reflect that changing timeline.

Don’t stop saving just because college is getting close

Parents sometimes assume that once a child reaches high school, it is too late for a 529 to make much difference.

That isn’t necessarily the case.

Continuing to contribute may still provide tax benefits and additional tax-advantaged growth, depending on your circumstances. Even contributions made during the college years may be worth considering as part of an overall education-funding strategy.

High school is also a great time to begin involving your child in financial conversations. Talk about what college costs, what your family has saved, what you expect to contribute, and what financial responsibility you expect your student to assume.

Those conversations can be just as valuable as the money you’ve saved.

College: Shift From Saving to Spending Strategically

When the tuition bills finally arrive, the question changes from “How much should we save?” to “How should we use what we’ve saved?”

This is where a little planning can make a meaningful difference.

Know what qualifies for a 529 withdrawal

For eligible postsecondary education, qualified 529 expenses generally include tuition and fees, required books and supplies, and certain computers, software and internet expenses. Room and board may also qualify when the student is enrolled at least half-time, subject to specific limits.

Don’t assume that every expense associated with college automatically qualifies. Transportation, travel and many personal expenses generally don’t.

Match withdrawals and expenses in the same tax year

Timing matters.

As a general planning practice, try to take the 529 distribution in the same calendar year that the qualified education expense is paid. A tuition bill paid in December followed by a 529 withdrawal in January can create unnecessary tax complications.

Keep good records

Save tuition statements, receipts for books and supplies, computer receipts, housing documentation and records of 529 withdrawals.

You may never need to produce them, but if questions arise later, having a clear paper trail can make life much easier.

Be careful with off-campus housing

Room and board can qualify for students enrolled at least half-time, but there are limits. For students living off campus, don’t simply assume the entire rent, utilities and grocery bill can be reimbursed from the 529.

Check the school’s published room-and-board allowance or cost-of-attendance figures and maintain documentation supporting the amount withdrawn.

Coordinate your 529 with education tax credits

This is one of the most important—and frequently overlooked—planning opportunities.

You generally can’t use the same education expense to justify both a tax-free 529 withdrawal and an education tax credit such as the American Opportunity Tax Credit.

That means automatically paying every tuition dollar from the 529 may not always produce the best tax result. Families should coordinate withdrawals with their tax professional to determine which expenses should be covered from the 529 and which may be better paid from other resources.

Account for scholarships

Receiving a scholarship is great news, but it can change your withdrawal strategy.

If scholarships reduce the amount of qualified expenses available to support tax-free 529 withdrawals, review your plan before taking distributions. There are special rules that may provide flexibility when a student receives a tax-free scholarship, but they should be considered as part of the family’s overall tax strategy.

What If You Don’t Use All the Money?

One concern we often hear is: “What happens if we save too much?”

529 plans offer more flexibility than many parents realize.

Depending on the circumstances, unused funds may potentially be:

• Kept in the account for future education
• Used for graduate school or other eligible education
• Transferred by changing the beneficiary to another qualifying family member
• Used for certain apprenticeship or credentialing expenses
• Used for limited student-loan repayments
• Rolled into a Roth IRA for the beneficiary if specific requirements are met

Current federal rules allow certain unused 529 assets to be rolled into a Roth IRA for the beneficiary, subject to requirements that include a $35,000 lifetime limit, annual Roth IRA contribution limits, a 15-year account requirement and additional restrictions.

That added flexibility can make the fear of “overfunding” a 529 less significant than it once was—but it still pays to plan carefully.

Back to School Is a Good Time for a Financial Checkup

Education planning isn’t simply about accumulating enough money to pay a tuition bill. It’s about deciding how education fits alongside retirement, taxes, cash flow, estate planning and your other family priorities.

If you have young children, the opportunity may be to start saving.

If you have teenagers, it may be time to turn your savings into a specific funding plan.

And if you have a child in college, the focus should shift toward withdrawing and coordinating those resources efficiently.

Every family’s numbers—and priorities—are different. As your children move from one stage to the next, your education strategy should evolve with them.

As the school year begins, consider sitting down with your financial advisor to review your 529 accounts, expected education costs and overall funding strategy. A little planning today can help you make more confident decisions when the next tuition bill arrives.