TL;DR – Listen to the article:
Over the last two decades, college tuition at private and out-of-state universities has increased by about 40%. For in-state schools, tuition grew by 56% over that same time period. Assuming this trend is unlikely to stop makes it more important than ever to plan ahead for your kids’ education. And the consequences of getting it wrong are becoming more expensive.
You might be asking yourself: “Well, how much do I need to save?” All in, the current average cost of college in the U.S. is just over $38,000 per student per year. This means you’ll likely need over $150,000 if you want to cover the entire cost of your child’s undergrad degree. If your child is 10+ years away from college, you’ll likely need over $200,000.
And now’s a great time to take a breath. While the numbers can feel daunting, there are ways to get there. Let’s run through a few of the most common accounts dentists can use to save for their kids’ education.
529 Plans
A 529 Plan is a tax-advantaged account that can be used to pay for educational expenses. The main type of 529 Plan is the Education Savings Plan. This is probably what you are most familiar with. You can contribute up to $18,000 per donor per beneficiary. That means if you are a married couple filing jointly, you can contribute $36,000 to each of your children per year. Some states set an overall max contribution which ranges from $235,000 to $575,000. You can find your state’s max contribution here.
The biggest benefit of a 529 is the potential tax savings. Withdrawals from a 529 are tax-free from federal and state income taxes if used for a qualifying educational expense. Additionally, some states will let you take a tax deduction or give you tax credits for contributing to your state’s 529.
The biggest disadvantage to consider is the limited use for the funds. While the government has relaxed the rules over time, you still have to use the funds for a qualified educational expense. Think tuition, books, room and board, trade school, grad programs, etc. If you want to use the funds for anything else, you’ll incur a 10% penalty.
The silver lining here is that you can change the beneficiary to a different child and you can roll over up to $35,000 of unused 529 funds to a Minor Roth IRA if you meet the requirements.
529 Plan TLDR;
Pro: Tax savings
Con: Fairly limited use of funds
Control level: Medium/High (you can change beneficiary but funds must be used for education).
Minor Roth IRAs
This is a popular savings vehicle for dentists with kids. It’s one of the perks of practice ownership! A Minor Roth IRA was designed to give kids a head start for retirement. However, there are more uses for a Minor Roth. To bring everyone up to speed, you can contribute up to $7,000 per year in 2024 to a Minor Roth IRA if you can prove that your child has earned income of an equal amount (e.g. modeling or working for the practice). The contributions go in after-tax but all the earnings are never taxed. Imagine if you contributed to your child’s Minor Roth for several years and those funds had potentially 50+ years to grow tax-free? Pretty sweet.
While the retirement benefits are huge, you can also use the funds for other things. For one, you can always access the contributions you made to the account. You paid your taxes on that money so the government doesn’t care. They just “lock” up the earnings portion until age 59½. Yes, we know – such a random age.
However, the government will not penalize you for using the funds for certain things like college education, unexpected emergency expenses, or a first-time home purchase. Your child will owe income tax on those dollars but won’t get hit with a 10% penalty for an early withdrawal.
Minor Roth IRAs TLDR;
Pro: Highest potential tax benefit and you can always access your contributions
Con: Earnings must be used for education, unexpected medical costs, first-time home purchase, or retirement
Control level: Medium/Low (you can withdraw the contributions but the funds completely transfer to your child at 18 or 21 depending on your state).
Brokerage accounts
A brokerage account is a savings account that allows you to buy stocks and bonds. You can use the account for whatever you’d like. There are no tax benefits. There are no penalties. This is both a pro and a con.
The taxes you’ll experience with a brokerage account are capital gains taxes. If you hold an investment for less than a year, you’ll pay short-term capital gains tax which is taxed at the same rate as your ordinary income. If you hold an investment for longer than one year, you’ll be taxed at the long-term capital gains tax rate which is 15% or 20% for most dentists.
While this seems like a con, the flexibility you’ll have can be more than worth it. You can use the funds to pay for your child’s first car, a wedding, backpacking across Europe together, etc. Think of it as paying a premium for maximum flexibility. If your child doesn’t end up needing funds for college (because they are so smart and got a full ride!), then the funds aren’t locked up with a penalty.
We see many dentists use this account for the benefit of maintaining flexibility.
Brokerage accounts TLDR;
Pro: Highest level of flexibility and no penalties associated with any withdrawals
Con: No tax benefits
Control level: High (you never have to transfer the funds to your child)
High yield savings accounts
If you have a shorter time frame for when you’ll need the funds for your child, consider a high yield savings account. As of August 2024, rates are around 4-5%. That is a pretty sweet return on your cash. As a general rule of thumb, we recommend using high yield savings accounts for cash needs within 2 years or for emergency funds.
High yield savings accounts TLDR;
Pro: Highest level of flexibility and no penalties associated with any withdrawals
Con: No tax benefits and no potential investment returns
Control level: High (you never have to transfer the funds to your child)
Paying for your child’s education is not a one-size-fits-all solution. Oftentimes, dentists use a combination of accounts. A great question to start off with is: how much of your child’s education do you want to pay for? All, some, or none? Some parents want to give their child the gift of covering the entire expense. Others want their child to have some skin in the game or have them pay for all of it. This is specific to your objectives.
Something to consider is: put your oxygen mask on before helping others. Keep in mind that tuition can be put on a loan. The same can’t be said for retirement. Compromising your retirement for the sake of your child’s education potentially puts you in a position where your children have to financially support you in your sunset years.
Here is a helpful way to think about it:
- We generally recommend a 20% savings rate – not including contributions to your kids’ accounts.
- If you have funds left over, then there is likely enough cash flow left over to save for your children.
- Ask yourself how much you’d like to cover for your child.
- Set up automatic contributions to the account(s) that fits your needs.
With the cost of tuition increasing, this decision is becoming increasingly important. With a little education and planning, you can make a huge difference in your kids’ futures.
529 Plans
A 529 Plan is a tax-advantaged account that can be used to pay for educational expenses. The main type of 529 Plan is the Education Savings Plan. This is probably what you are most familiar with. You can contribute up to $18,000 per donor per beneficiary. That means if you are a married couple filing jointly, you can contribute $36,000 to each of your children per year. Some states set an overall max contribution which ranges from $235,000 to $575,000. You can find your state’s max contribution here.
The biggest benefit of a 529 is the potential tax savings. Withdrawals from a 529 are tax-free from federal and state income taxes if used for a qualifying educational expense. Additionally, some states will let you take a tax deduction or give you tax credits for contributing to your state’s 529.
The biggest disadvantage to consider is the limited use for the funds. While the government has relaxed the rules over time, you still have to use the funds for a qualified educational expense. Think tuition, books, room and board, trade school, grad programs, etc. If you want to use the funds for anything else, you’ll incur a 10% penalty.
The silver lining here is that you can change the beneficiary to a different child and you can roll over up to $35,000 of unused 529 funds to a Minor Roth IRA if you meet the requirements.
529 Plan TLDR;
Pro: Tax savings
Con: Fairly limited use of funds
Control level: Medium/High (you can change beneficiary but funds must be used for education).
Minor Roth IRAs
This is a popular savings vehicle for dentists with kids. It’s one of the perks of practice ownership! A Minor Roth IRA was designed to give kids a head start for retirement. However, there are more uses for a Minor Roth. To bring everyone up to speed, you can contribute up to $7,000 per year in 2024 to a Minor Roth IRA if you can prove that your child has earned income of an equal amount (e.g. modeling or working for the practice). The contributions go in after-tax but all the earnings are never taxed. Imagine if you contributed to your child’s Minor Roth for several years and those funds had potentially 50+ years to grow tax-free? Pretty sweet.
While the retirement benefits are huge, you can also use the funds for other things. For one, you can always access the contributions you made to the account. You paid your taxes on that money so the government doesn’t care. They just “lock” up the earnings portion until age 59½. Yes, we know – such a random age.
However, the government will not penalize you for using the funds for certain things like college education, unexpected emergency expenses, or a first-time home purchase. Your child will owe income tax on those dollars but won’t get hit with a 10% penalty for an early withdrawal.
Minor Roth IRAs TLDR;
Pro: Highest potential tax benefit and you can always access your contributions
Con: Earnings must be used for education, unexpected medical costs, first-time home purchase, or retirement
Control level: Medium/Low (you can withdraw the contributions but the funds completely transfer to your child at 18 or 21 depending on your state).
Brokerage accounts
A brokerage account is a savings account that allows you to buy stocks and bonds. You can use the account for whatever you’d like. There are no tax benefits. There are no penalties. This is both a pro and a con.
The taxes you’ll experience with a brokerage account are capital gains taxes. If you hold an investment for less than a year, you’ll pay short-term capital gains tax which is taxed at the same rate as your ordinary income. If you hold an investment for longer than one year, you’ll be taxed at the long-term capital gains tax rate which is 15% or 20% for most dentists.
While this seems like a con, the flexibility you’ll have can be more than worth it. You can use the funds to pay for your child’s first car, a wedding, backpacking across Europe together, etc. Think of it as paying a premium for maximum flexibility. If your child doesn’t end up needing funds for college (because they are so smart and got a full ride!), then the funds aren’t locked up with a penalty.
We see many dentists use this account for the benefit of maintaining flexibility.
Brokerage accounts TLDR;
Pro: Highest level of flexibility and no penalties associated with any withdrawals
Con: No tax benefits
Control level: High (you never have to transfer the funds to your child)
High yield savings accounts
If you have a shorter time frame for when you’ll need the funds for your child, consider a high yield savings account. As of August 2024, rates are around 4-5%. That is a pretty sweet return on your cash. As a general rule of thumb, we recommend using high yield savings accounts for cash needs within 2 years or for emergency funds.
High yield savings accounts TLDR;
Pro: Highest level of flexibility and no penalties associated with any withdrawals
Con: No tax benefits and no potential investment returns
Control level: High (you never have to transfer the funds to your child)
Paying for your child’s education is not a one-size-fits-all solution. Oftentimes, dentists use a combination of accounts. A great question to start off with is: how much of your child’s education do you want to pay for? All, some, or none? Some parents want to give their child the gift of covering the entire expense. Others want their child to have some skin in the game or have them pay for all of it. This is specific to your objectives.
Something to consider is: put your oxygen mask on before helping others. Keep in mind that tuition can be put on a loan. The same can’t be said for retirement. Compromising your retirement for the sake of your child’s education potentially puts you in a position where your children have to financially support you in your sunset years.
Here is a helpful way to think about it:
- We generally recommend a 20% savings rate – not including contributions to your kids’ accounts.
- If you have funds left over, then there is likely enough cash flow left over to save for your children.
- Ask yourself how much you’d like to cover for your child.
- Set up automatic contributions to the account(s) that fits your needs.
With the cost of tuition increasing, this decision is becoming increasingly important. With a little education and planning, you can make a huge difference in your kids’ futures.
529 Plans
A 529 Plan is a tax-advantaged account that can be used to pay for educational expenses. The main type of 529 Plan is the Education Savings Plan. This is probably what you are most familiar with. You can contribute up to $18,000 per donor per beneficiary. That means if you are a married couple filing jointly, you can contribute $36,000 to each of your children per year. Some states set an overall max contribution which ranges from $235,000 to $575,000. You can find your state’s max contribution here.
The biggest benefit of a 529 is the potential tax savings. Withdrawals from a 529 are tax-free from federal and state income taxes if used for a qualifying educational expense. Additionally, some states will let you take a tax deduction or give you tax credits for contributing to your state’s 529.
The biggest disadvantage to consider is the limited use for the funds. While the government has relaxed the rules over time, you still have to use the funds for a qualified educational expense. Think tuition, books, room and board, trade school, grad programs, etc. If you want to use the funds for anything else, you’ll incur a 10% penalty.
The silver lining here is that you can change the beneficiary to a different child and you can roll over up to $35,000 of unused 529 funds to a Minor Roth IRA if you meet the requirements.
529 Plan TLDR;
Pro: Tax savings
Con: Fairly limited use of funds
Control level: Medium/High (you can change beneficiary but funds must be used for education).
Minor Roth IRAs
This is a popular savings vehicle for dentists with kids. It’s one of the perks of practice ownership! A Minor Roth IRA was designed to give kids a head start for retirement. However, there are more uses for a Minor Roth. To bring everyone up to speed, you can contribute up to $7,000 per year in 2024 to a Minor Roth IRA if you can prove that your child has earned income of an equal amount (e.g. modeling or working for the practice). The contributions go in after-tax but all the earnings are never taxed. Imagine if you contributed to your child’s Minor Roth for several years and those funds had potentially 50+ years to grow tax-free? Pretty sweet.
While the retirement benefits are huge, you can also use the funds for other things. For one, you can always access the contributions you made to the account. You paid your taxes on that money so the government doesn’t care. They just “lock” up the earnings portion until age 59½. Yes, we know – such a random age.
However, the government will not penalize you for using the funds for certain things like college education, unexpected emergency expenses, or a first-time home purchase. Your child will owe income tax on those dollars but won’t get hit with a 10% penalty for an early withdrawal.
Minor Roth IRAs TLDR;
Pro: Highest potential tax benefit and you can always access your contributions
Con: Earnings must be used for education, unexpected medical costs, first-time home purchase, or retirement
Control level: Medium/Low (you can withdraw the contributions but the funds completely transfer to your child at 18 or 21 depending on your state).
Brokerage accounts
A brokerage account is a savings account that allows you to buy stocks and bonds. You can use the account for whatever you’d like. There are no tax benefits. There are no penalties. This is both a pro and a con.
The taxes you’ll experience with a brokerage account are capital gains taxes. If you hold an investment for less than a year, you’ll pay short-term capital gains tax which is taxed at the same rate as your ordinary income. If you hold an investment for longer than one year, you’ll be taxed at the long-term capital gains tax rate which is 15% or 20% for most dentists.
While this seems like a con, the flexibility you’ll have can be more than worth it. You can use the funds to pay for your child’s first car, a wedding, backpacking across Europe together, etc. Think of it as paying a premium for maximum flexibility. If your child doesn’t end up needing funds for college (because they are so smart and got a full ride!), then the funds aren’t locked up with a penalty.
We see many dentists use this account for the benefit of maintaining flexibility.
Brokerage accounts TLDR;
Pro: Highest level of flexibility and no penalties associated with any withdrawals
Con: No tax benefits
Control level: High (you never have to transfer the funds to your child)
High yield savings accounts
If you have a shorter time frame for when you’ll need the funds for your child, consider a high yield savings account. As of August 2024, rates are around 4-5%. That is a pretty sweet return on your cash. As a general rule of thumb, we recommend using high yield savings accounts for cash needs within 2 years or for emergency funds.
High yield savings accounts TLDR;
Pro: Highest level of flexibility and no penalties associated with any withdrawals
Con: No tax benefits and no potential investment returns
Control level: High (you never have to transfer the funds to your child)
Paying for your child’s education is not a one-size-fits-all solution. Oftentimes, dentists use a combination of accounts. A great question to start off with is: how much of your child’s education do you want to pay for? All, some, or none? Some parents want to give their child the gift of covering the entire expense. Others want their child to have some skin in the game or have them pay for all of it. This is specific to your objectives.
Something to consider is: put your oxygen mask on before helping others. Keep in mind that tuition can be put on a loan. The same can’t be said for retirement. Compromising your retirement for the sake of your child’s education potentially puts you in a position where your children have to financially support you in your sunset years.
Here is a helpful way to think about it:
- We generally recommend a 20% savings rate – not including contributions to your kids’ accounts.
- If you have funds left over, then there is likely enough cash flow left over to save for your children.
- Ask yourself how much you’d like to cover for your child.
- Set up automatic contributions to the account(s) that fits your needs.
With the cost of tuition increasing, this decision is becoming increasingly important. With a little education and planning, you can make a huge difference in your kids’ futures.
529 Plans
A 529 Plan is a tax-advantaged account that can be used to pay for educational expenses. The main type of 529 Plan is the Education Savings Plan. This is probably what you are most familiar with. You can contribute up to $18,000 per donor per beneficiary. That means if you are a married couple filing jointly, you can contribute $36,000 to each of your children per year. Some states set an overall max contribution which ranges from $235,000 to $575,000. You can find your state’s max contribution here.
The biggest benefit of a 529 is the potential tax savings. Withdrawals from a 529 are tax-free from federal and state income taxes if used for a qualifying educational expense. Additionally, some states will let you take a tax deduction or give you tax credits for contributing to your state’s 529.
The biggest disadvantage to consider is the limited use for the funds. While the government has relaxed the rules over time, you still have to use the funds for a qualified educational expense. Think tuition, books, room and board, trade school, grad programs, etc. If you want to use the funds for anything else, you’ll incur a 10% penalty.
The silver lining here is that you can change the beneficiary to a different child and you can roll over up to $35,000 of unused 529 funds to a Minor Roth IRA if you meet the requirements.
529 Plan TLDR;
Pro: Tax savings
Con: Fairly limited use of funds
Control level: Medium/High (you can change beneficiary but funds must be used for education).
Minor Roth IRAs
This is a popular savings vehicle for dentists with kids. It’s one of the perks of practice ownership! A Minor Roth IRA was designed to give kids a head start for retirement. However, there are more uses for a Minor Roth. To bring everyone up to speed, you can contribute up to $7,000 per year in 2024 to a Minor Roth IRA if you can prove that your child has earned income of an equal amount (e.g. modeling or working for the practice). The contributions go in after-tax but all the earnings are never taxed. Imagine if you contributed to your child’s Minor Roth for several years and those funds had potentially 50+ years to grow tax-free? Pretty sweet.
While the retirement benefits are huge, you can also use the funds for other things. For one, you can always access the contributions you made to the account. You paid your taxes on that money so the government doesn’t care. They just “lock” up the earnings portion until age 59½. Yes, we know – such a random age.
However, the government will not penalize you for using the funds for certain things like college education, unexpected emergency expenses, or a first-time home purchase. Your child will owe income tax on those dollars but won’t get hit with a 10% penalty for an early withdrawal.
Minor Roth IRAs TLDR;
Pro: Highest potential tax benefit and you can always access your contributions
Con: Earnings must be used for education, unexpected medical costs, first-time home purchase, or retirement
Control level: Medium/Low (you can withdraw the contributions but the funds completely transfer to your child at 18 or 21 depending on your state).
Brokerage accounts
A brokerage account is a savings account that allows you to buy stocks and bonds. You can use the account for whatever you’d like. There are no tax benefits. There are no penalties. This is both a pro and a con.
The taxes you’ll experience with a brokerage account are capital gains taxes. If you hold an investment for less than a year, you’ll pay short-term capital gains tax which is taxed at the same rate as your ordinary income. If you hold an investment for longer than one year, you’ll be taxed at the long-term capital gains tax rate which is 15% or 20% for most dentists.
While this seems like a con, the flexibility you’ll have can be more than worth it. You can use the funds to pay for your child’s first car, a wedding, backpacking across Europe together, etc. Think of it as paying a premium for maximum flexibility. If your child doesn’t end up needing funds for college (because they are so smart and got a full ride!), then the funds aren’t locked up with a penalty.
We see many dentists use this account for the benefit of maintaining flexibility.
Brokerage accounts TLDR;
Pro: Highest level of flexibility and no penalties associated with any withdrawals
Con: No tax benefits
Control level: High (you never have to transfer the funds to your child)
High yield savings accounts
If you have a shorter time frame for when you’ll need the funds for your child, consider a high yield savings account. As of August 2024, rates are around 4-5%. That is a pretty sweet return on your cash. As a general rule of thumb, we recommend using high yield savings accounts for cash needs within 2 years or for emergency funds.
High yield savings accounts TLDR;
Pro: Highest level of flexibility and no penalties associated with any withdrawals
Con: No tax benefits and no potential investment returns
Control level: High (you never have to transfer the funds to your child)
Paying for your child’s education is not a one-size-fits-all solution. Oftentimes, dentists use a combination of accounts. A great question to start off with is: how much of your child’s education do you want to pay for? All, some, or none? Some parents want to give their child the gift of covering the entire expense. Others want their child to have some skin in the game or have them pay for all of it. This is specific to your objectives.
Something to consider is: put your oxygen mask on before helping others. Keep in mind that tuition can be put on a loan. The same can’t be said for retirement. Compromising your retirement for the sake of your child’s education potentially puts you in a position where your children have to financially support you in your sunset years.
Here is a helpful way to think about it:
- We generally recommend a 20% savings rate – not including contributions to your kids’ accounts.
- If you have funds left over, then there is likely enough cash flow left over to save for your children.
- Ask yourself how much you’d like to cover for your child.
- Set up automatic contributions to the account(s) that fits your needs.
With the cost of tuition increasing, this decision is becoming increasingly important. With a little education and planning, you can make a huge difference in your kids’ futures.