Tax tips: Saving for college

Winnie Sun, Sun Group Wealth Partners Financial Advisor joins the Yahoo Finance Live panel to discuss the best uses of the expanded child tax credit money to save for your children's college education.

Video transcript

AKIKO FUJITA: It is time for our weekly "Tax Time" segment. And today, we're talking about smart tax strategies and saving for college. The American Rescue Plan, of course, dramatically expanded the child tax credit, and that means parents will start receiving up to $3,000 per child-- that credit starting this summer. So how do you grow that money even more?

Let's bring in Winnie Sun, Sun Group Wealth Partners Financial Advisor. Winnie, it's good to talk to you today. So how should parents be thinking about this as they look ahead to the credit? The bulk of it will come in 2021, but certainly, a lot of parents looking to see how they can save this and grow it even more once they get that credit for 2020.

WINNIE SUN: Well, Akiko, I think it's a great question. I think as a parent, when you're seeing these funds, you think about how you want to spend it for your child. Obviously, many of us quickly think, well, why not put it towards college? Because our children will at some point want that opportunity for higher education, and we can really make this money grow much further for a very important financial goal.

ZACK GUZMAN: Yeah. I mean, obviously, the costs are going up rather quickly when we talk about higher ed-- $244,000 is the expectations to send a toddler here to an in-state public education for four years. When you look at what can be done in setting up some of these 529s, it's a daunting number to plan for. But how have you seen maybe people adjust their savings plans using 529s plans to actually hit that number once their kids reach the age of college?

WINNIE SUN: Zack, I totally feel you right now, because I have three little ones downstairs doing their distance learning. So it is really daunting. The numbers are huge, right-- to save a quarter million by the time they reach around college age. So the best thing to do is actually to take the money, for example, the child tax credit, if you get a bonus at work-- those one-off situations-- maybe your child's getting some birthday money or holiday money-- is to continue to add that to a college savings plan like the 529, which is really one of my favorite ways to save for college.

The other you would do is I always recommend my clients whenever possible to set up an automatic contribution, just like you contribute into your 401(k) at work. You should be able to contribute also, if you can, to your child's education. So the rule of thumb is the earlier you start, the better. Like my oldest child, I started his actually a year before he was born, because you can designate a beneficiary regardless of age.

So even before he was born, I put myself as a beneficiary as, you know, he received a Social Security number. You can then decide whether or not to transfer that into your child as a new beneficiary. So the earlier you start, the better. But if you're getting closer to college age, I wouldn't stress you. You can still continue to contribute, because that money can continue to grow tax deferred.

AKIKO FUJITA: Obviously, we're thinking long-term here in terms of being able to save for college, but can you talk also about the tax benefits? I mean, there's obviously the savings element, but there's also tax benefits putting your money in a 529, correct?

WINNIE SUN: Right. Akiko, one of the best benefits of this is I want you to think of the 529 as almost a large Roth IRA designed for education. So what I mean by that is the contributions that you put in are after-tax-- this money that's already in your bank account-- but the money will grow tax deferred and federal tax free if used for higher education. And in the 30 different states across the union, you actually get an additional state tax benefit as well.

So in both scenarios, whatever you can put away towards the college savings plan is going to be a direct benefit to your child when your child reaches of age for college. And now, thanks to other benefits such as the SECURE Act, you can even use that money, or actually the tax cut in 2017, also allows you to use that money for K through 12 if necessary as well. So there's a lot of flexibility. So it used to be it was just for college. Now it could be for a culinary Institute or a trade school too-- so a lot of benefits.